Ask the Experts: How do we plan for retirement?
NAME: Kathleen Murray
STATUS: Married with two children, 14 and 11.
QUESTIONS: How do we plan for retirement? Should we salary sacrifice more through non-concessional contributions or do we leverage off our home and investment properties to invest elsewhere? How do we help set up our kids?
ANSWERS: Continue salary sacrificing and take advantage of the non-concessional contributions to super. When the property market dips, look to add another property or two to your portfolio. Keep your insurances and estate planning up to date.
Retirement is a long journey and good preparation is key. But even with compulsory superannuation contributions now at a robust 9.5%, only 15% of Australians feel well prepared. The vast majority (around 66%) feel unprepared for their retirement, according to research by MLC.
Perhaps it's not surprising that people find preparing for a secure retirement hard because there are so many big variables, such as their longevity, investment performance, the state of their health and family needs.
Retirement is still a decade away for Kathleen, 47, and her 52-year-old husband Tim but she wants to know if they are heading in the right direction.
"How does one sensibly plan for the right amount to comfortably retire on with a shifting focus on being fully self-sufficient?"
Kathleen wants to consider different scenarios and needs a resilient plan. Are their finances on track? Is there anything they should be doing better now to get there?
"It seems a bit overwhelming but we want to make the next 10 years in the workforce really count," she says.
They have around $435,000 in superannuation, largely in Tim's REST account. He salary sacrifices to the maximum level of $35,000 a year.
They have kept a 1920s apartment that Kathleen bought 20 years ago when she was single. They have never had a problem finding tenants so they bought another similar apartment six years ago. Their investment property debt is around $600,000 and their rental income around $35,000.
They are set to inherit a small sum and wonder what to do with it.
"I am concerned that a financial planner will be more keen on selling products and strategies rather than fully targeting or customising our needs," says Kathleen.
"Where should we focus our efforts? More super contributions through non-concessional amounts? Or do we leverage off the equity in our home or flats and invest somewhere else?"
At the same time they want to set up something for their kids. What is the best way to do this?
Aim for $2 million to maintain lifestyle, says Michael Hutton, a wealth management partner at HLB Mann Judd Sydney
If Kathleen and Tim require an annual after-tax income of, say, $100,000 to maintain their lifestyle in retirement, they'd need about $2 million in investment wealth on retirement to preserve their capital base and live off the investment earnings. This is assuming they can draw at 5%pa and not eat into capital over the longer term.
Strategies they could consider include:
Continue making the maximum concessional contributions to Tim's superannuation account. Although this will be limited to $25,000 from July 1, it is a good way to boost super over the next 10 years. This is likely to get them halfway to what they'd need in retirement by age 62, being about $1 million (in today's dollars).
To boost Kathleen's super balance Tim could make non-concessional (after-tax) contributions of up to $3000 on her behalf and claim a tax offset of up to $540 in his personal tax return. To be eligible for the full rebate, Kathleen's taxable income would have to be below $10,800 for the 2016-17 financial year. From July 1 the income threshold will increase to $37,000.
Review the investment strategy of your super to ensure an appropriate level of risk is being taken. Longer-term investments of five years or more should have a substantial allocation to risky assets such as shares. An investment time frame of five years or more allows enough time to ride out the short-term volatility of shares.
Where one partner has no taxable income, it can be more tax effective to invest in their name rather than in super. Individuals can earn up to $18,200 before paying tax while income earned on money invested in super is taxed at 15%. Consider investing any surplus rental income in Kathleen's name rather than making non-concessional contributions to super now.
Kathleen could set up a family trust which, together with the rental properties, will be able to provide the other half of income required in retirement. Family trusts provide flexibility in distributing income to lower-income earners. They also provide asset protection and are fully accessible to the family as and when funds are needed, whereas access to super is most often restricted until retirement.
Consider estate planning to make provisions for kids to be looked after financially over the long term should something happen to Kathleen and Tim.
Have appropriate life insurance to provide for the family if something were to happen to Kathleen or Tim. Income protection can be crucial to protecting the financial position of a family where they depend on the income-earning capacity of one spouse.
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