Retirement can be a risky business by YourLifeChoices

Retirement Affordability Index

™

ISSUE 18 AUGUST 2021

Retirement CAN can BE be A a RISKY risky BUSINESS business RETIREMENT experts outlinetake, the risks take,and those shouldn’t the TheOur risks you should thoseyou youshould shouldn’t theyou most commonand mistakes most common mistakes along the way. made alongmade the way. www.yourlifechoices.com.au

www.yourlifechoices.com.au

You’ve got a lot of living to do in retirement. Are you confident you can pay for it?

The cost of living certainly isn’t getting any cheaper. By using part of your super or savings, add a Challenger lifetime annuity to your retirement income and you’ll enjoy guaranteed income for life that can keep pace with inflation. It can complement your other income sources, like your super and the Age Pension. So like thousands of other retirees, you too can look forward with confidence. To find out more, go to challenger.com.au or speak to your financial adviser.

Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger Guaranteed Annuity (Liquid Lifetime). This information has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Challenger Guaranteed Annuity (Liquid Lifetime) Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the annuity. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at challenger.com.au. All references to guaranteed payments refer to the payments Challenger promises to pay under the relevant policy documents. Neither the Challenger group of companies nor any company within the Challenger group guarantees the performance of Challenger’s obligations or assumes any obligations in respect of products issued, or guarantees given, by Challenger. 46108/0621

Contents

Published by: YourLifeChoices Pty Ltd Publisher: Leon Della Bosca Editor: Janelle Ward Copy Editor: Dairne John Writers: Robin Bowerman, Matt Grudnoff, Ben Hocking, Camille Schmidt, Janelle Ward Cover Design: Leon Della Bosca Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9081 9997 All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes. IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor. Copyright: YourLifeChoices Pty Ltd 2021

How to ensure you won’t enjoy retirement The ‘golden years’ will turn to tin if you make these mistakes

Why household budgets are under pressure We explain what pushed up your living costs in the June quarter

Government reports just a scare tactic? Reports designed to make us feel poor and afraid, says economist Matt Grudnoff

The big three retirement risks How to sleep better and keep your retirement income plan on track

Most common Age Pension mistakes The key reasons you may be missing out on valuable retirement income

Winners and losers when markets are savaged Strategist Robin Bowerman tells who sailed through a bumpy 2020 – and how

It’s your money – make it work hard Superannuation specialist Camille Schmidt reveals how to turbocharge your nest egg

Government update Age Pension updates, superannuation changes, key tax time dates

4 10 14 16 19

YourLifeChoices Retirement Affordability Index™ August 2021

How to ensure your retirement will be plagued by worry and uncertainty They have been called the golden years, but they’ll turn to tin if you make these mistakes, writes Janelle Ward.

hether retirement is warmly embraced or sleeplessly feared can be the difference between planning well ahead of time and heeding the mistakes of others or being unprepared and unwilling to seek help. With that in mind, here are the retirement moves you don’t want to make.

1. P lace your super in the lowest risk investment category Your super fund invests your money for you. You can choose from a range of investment options, from conservative to growth, and move your funds as you wish. When COVID first hit, there were reports of many members shifting to cash or conservative options. Better to be safe than sorry, right? The problem with that strategy was that in the 202021 financial year, even the worst-performing super funds recorded double-digit returns. Funds left in cash or conservative options did not share in the glory. In late July, Association of Superannuation Funds of Australia’s (ASFA) chief executive Martin Fahy reported that super results had been the strongest in nearly 30 years. In terms of super funds generally, Mano Mohankumar, senior investment research manager at data and analytics provider Chant West, says that over the longest period able to be measured, Australia’s major super funds have delivered on their promises to members to grow their wealth in real terms and protect them from undue risk.

great way to invest, and people should be confident entrusting their savings to the major Australian funds that are among the best in the world.” If you have a MySuper account, you’ll most likely have a balanced, single diversified option. But it pays to check. And while you’re there, consider how you can bolster your nest egg and reduce tax through salary sacrificing and voluntary contributions.

2. Don’t draw down sufficient funds from your super pension account The federal government’s Retirement Income Report found the current minimum drawdown rules that apply to account-based super fund pensions – and which have been temporarily halved due to the pandemic – are being viewed as an anchor or guide by many retirees as they spend their super. Mercer research shows that about half of all retirees drawing on their super do not exceed the required minimum amount.

Too many retirees are focused on asset preservation US asset-management giant T. Rowe Price says: “Conventional retirement income planning assumes that retirees want to maintain a certain standard of living or a certain level of spending and attempt to generate enough income to support that spending level.

“That’s a great achievement,” he says. “And it’s a message that should be conveyed as widely as possible. Super has proven to be a 4

YourLifeChoices Retirement Affordability Index™ August 2021

“But the data suggest that the opposite might be true. People are flexible about their spending and adjust it to match their income so they can avoid drawing down their assets.”

Underspending in retirement is rampant Financial analyst Kathryn Del Greco says: “Some people make many sacrifices preparing for retirement. What I see happen is they get stuck in a mindset of not wanting to touch their nest egg and spend it, which compromises their quality of life and what they thought their retirement would look like.” A common regret she sees is people putting off travel and then, suddenly, they can’t take a trip, either due to ill-health or, more recently, the pandemic. “Some people keep putting off enjoying the experiences and pleasures that life has to offer because they’re so busy saving for retirement,” she says. “Retirement doesn’t guarantee that you’re going to have the health to enjoy it. There should be a balance.”

3. P ut all your private savings in the bank where it’s as safe as houses True, but we all know that official interest rates are at record lows. The best term deposit rates on offer as we entered the 2021-22 financial year were less than 1 per cent. Yes, we’re advised to keep an emergency fund that is readily accessible, but too much money in that fund is poor management.

4. Don’t seek financial advice The YourLifeChoices Older Australian Insights Survey 2021 revealed that 61.3 per cent of the 7000-plus respondents did not seek either financial or retirement planning advice. And yet when asked whether they were confident their savings would provide an income for life, 57 per cent said no. Surveys consistently reveal that financial advice leads to happier outcomes. The IOOF True value of advice survey concluded that people who receive ongoing financial planning advice experience:

• 13 per cent greater levels of overall personal happiness • 21 per cent overall increase in peace of mind • 20 per cent increased feelings of security regarding their day-to-day finances • 19 per cent less likelihood of arguments with loved ones. Those who didn’t receive financial advice were: • 22 per cent more likely to have their sleep disrupted due to money concerns • 15 per cent more likely to feel stress and anxiety • 11 per cent more likely to feel concerned about their finances.

5. Ignore longevity calculators Today, an Australian male aged 50 years can expect to live another 32.9 years, and a female another 36.3 years. For anyone who retires at Age Pension eligibility age (currently 66.5 years), there’s a long way to go. It is both uplifting and sobering to consider our life expectancy – more time to do the things we always wanted to do and more time to run out of money. But again, confidence comes with planning. There are a number of sites that have free longevity calculators, including mylongevity.com.au and the Optimum Pensions Lifespan Calculator. These will at least open your eyes to the probabilities.

6. Ignore inflation Part of YourLifeChoices’ mission with the Retirement Affordability Index™ is to track the quarterly rise (or fall) in living costs and give our members a reliable and accurate estimate of different levels of retirement living, be they well-off, constrained or cash-strapped. The numbers go up each year. The Reserve Bank of Australia (RBA) inflation calculator says that a basket of goods that cost $20 in 1990 would cost $40 in 2020. The purchasing power of the dollar takes a hit over time, meaning that an income that was more than adequate at the start of retirement can be stretched thin after even 10 to 15 years – and perhaps be inadequate over a 30-year retirement.

YourLifeChoices Retirement Affordability Index™ August 2021

7. D on’t consider how your home can boost your retirement income In the YourLifeChoices Older Australian Insights Survey 2021, 71.6 per cent of respondents said they owned their home outright and another 12.9 per cent said they owned their home with a mortgage. Given the surge in home prices over the past 12 months, particularly in Sydney and Melbourne where median prices are $1.2 million and $1 million respectively, there’s a lot of wealth tied up in property. And it’s wealth that can be turned into retirement income. The government offering is the Pension Loans Scheme, which received a partial makeover in the most recent federal budget, but there are also several commercial offerings for reverse mortgage and equity release products. Downsizing is also an option. The federal government’s downsizer superannuation contribution scheme started in July 2018 and allows eligible individuals aged over 65 to place up to $300,000 (couples $600,000) into their superannuation from the sale of their family home.

According to the government’s Retirement Income Review, by 2060, one in every three dollars paid out of the superannuation system will be an inheritance rather than retirement income. “Partly because they have only ever been primed to save as large a lump sum as possible, retirees struggle with the concept that superannuation is to be consumed to fund their retirement,” wrote Treasury. “Because retirees struggle to develop effective retirement income strategies on their own, much of the savings accrued by members through the superannuation system are not used to provide retirement income.”

‘What I see happen is [retirees] get stuck in a mindset of not wanting to touch their nest egg and spend it, which compromises the quality of life.’

8. D on’t check at least annually whether you qualify for an Age Pension or for an increase

Challenger’s chairman of retirement income, Jeremy Cooper, told YourLifeChoices that prudent retirees, whether they be 66 or 88, regularly revisit their financial position to determine whether they are receiving the maximum Age Pension income for which they are eligible. The pension is indexed twice a year (apart from in September 2020 due to COVID) and new thresholds could then make you eligible for a pension or a pension increase.

9. B e determined to leave an inheritance The YourLifeChoices Older Australian Insights Survey 2021 found that more than 72 per cent of respondents intended to leave an inheritance and 74 per cent of that group said that aim was not restricting them financially in their lives today. But baby boomers should keep in mind that younger generations will have had the benefit of an entire working life of super contributions when they retire. 6

A Tax Institute report estimates that over the next two decades, Australians aged over 60 will transfer $3.5 trillion in wealth.

Just pause for thought.

10. Don’t connect with the community, don’t eat well and don’t look after your mental and physical health There are an increasing number of ‘superagers’ across the world.

Scientists are still studying what makes a superager. What they know is that regular physical and mental activity reduces health risks, intense physical activity increases aerobic capacity, and intense mental activity preserves areas of the brain involved in memory and reasoning. Harvard Health research says: embrace mental challenges, increase your exercise capacity, prepare to be frustrated, don’t let your age deter you and get going with a group. Of course, diet also plays a big part in healthy ageing, with the Mediterranean diet regularly held up as the gold standard. So now you know what not to do. It’s all very well to make your own mistakes, but if someone else has made them before you … DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without considering your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before deciding based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

YourLifeChoices Retirement Affordability Index™ August 2021

Household budgets put under pressure in June quarter

he annualised Consumer Price Index (CPI) was 3.8 per cent in the June quarter. Does this mean inflation is rapidly spinning out of control? No – so don’t panic. In the June 2020 quarter, we had a massive drop in the CPI. The quarterly change was -1.9 per cent, but was largely driven by two things: free childcare and a big drop in petrol prices. Both were temporary.

Household furnishings and equipment do not usually have a big impact on inflation, but the housing boom has seen timber in short supply and that has pushed up the price of timber-based furniture (+3.8% per cent).

Transport was up because oil prices continue to rise, pushing petrol prices higher (+6.5 per cent). The generous business tax write-offs for utes also pushed up average motor vehicle prices (+2.2 per cent).

The cash-strapped saw the smallest increase in prices (+0.6 per cent) because they’re less likely to have private health insurance and spend a smaller proportion of their income on transport. Constrained couples saw the biggest increase (+0.9 per cent) because they’re more likely to have private health insurance and they’re more likely to be tripping around Australia. Constrained and welloff singles and well-off couples all saw an increase of 0.8 per cent.

The main driver of the healthcare increase was the rise in private health insurance premiums (+2.4 per cent).

Matt Grudnoff Senior economist, The Australia Institute

The drivers of inflation this quarter were transport, healthcare and household furnishings and equipment.

Weekly expenditure for retirees aged 54+ Expenditure items Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure Food & non-alcoholic beverages As a percentage of expenditure Alcoholic beverages & tobacco products As a percentage of expenditure Clothing and footwear As a percentage of expenditure Household furnishings & equipment As a percentage of expenditure Household services & operation As a percentage of expenditure Medical & health care As a percentage of expenditure Transport As a percentage of expenditure Communication As a percentage of expenditure Recreation As a percentage of expenditure Education As a percentage of expenditure Personal care As a percentage of expenditure Miscellaneous goods & services As a percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure

Well-off couples

Constrained couples

Couple Couple homeowners homeowners with private on Age income Pension $183.67 12% $42.75 3% $250.83 17% $57.41 4% $30.94 2% $77.49 5% $43.74 3% $156.16 10% $200.91 13% $34.12 2% $300.97 20% $0.62 0% $29.80 2% $91.17 6% $1,500.59 +$21.60* $6,502.54 +$93.59* $78,030.52 +$1,123.14*

*Percentage and dollar changes compared with March quarter figures

$108.56 13% $32.11 4% $176.67 20% (-1%) $31.20 4% $17.56 2% $33.62 4% $30.94 4% $111.30 13% $130.43 15% (+1%) $24.18 3% $102.21 12% $0.22 0% $18.08 2% $49.17 6% $866.25 +$14.53* $3,753.76 +$62.96* $45,045.14 +$755.48*

Cashstrapped couples

Well-off singles

Constrained singles

Cashstrapped singles

Couple who rent on Age Pension

Single homeowner with private income

Single homeowner on Age Pension

Single who rents on Age Pension

$123.41 14% (-1%) $30.92 4% $126.02 15% $30.82 4% $20.58 2% $42.40 5% $39.46 5% $89.67 10% $106.43 12% $33.02 4% $140.18 16% (-1%) 0.13 0% $18.56 2% 55.34 6% (-1%) $856.95 +$12.03* $3,713.45 +$52.14* $44,561.39 +$625.61*

$91.08 19% $27.68 6% $88.57 19% $18.30 4% $8.93 2% $19.69 4% $22.30 5% $39.71 8% $54.28 11% $17.05 4% $52.73 11% $0.12 0% $9.79 2% $26.93 6% $477.17 +$6.40* $2,067.72 +$27.72* $24,812.63 +$332.62*

$161.97 36% $23.49 5% $79.38 17% $25.69 6% $7.36 2% $15.70 3% $11.85 3% $23.50 5% $36.61 8% $13.30 3% $31.82 7% $0.01 0% $8.68 2% $16.78 4% $456.14 +$4.56* $1,976.62 +$19.78* $23,719.41 +$237.39*

$205.60 28% (-1%) $33.89 5% $159.75 22% $50.71 7% $9.29 1% $20.46 3% $16.71 2% $38.54 5% $62.01 9% (+1%) $26.16 4% $66.46 9% $0 0% $12.57 2% $24.59 3% $726.73 +$7.78* $3,149.17 +$33.72* $37,790.02 +$404.56*

YourLifeChoices Retirement Affordability Index™ August 2021

How the government justifies capped spending on pensions and healthcare Intergenerational Reports are designed to make Australians feel poor and afraid, writes The Australia Institute senior economist Matt Grudnoff.

he fifth Intergenerational Report (IGR) is out. This is the report, which usually comes out every five years, that projects the economy and the Australian government’s budget for the next 40 years. This could be the moment when our political leaders finally focus on the long-term future of Australia and do the kind of big-picture planning many of us wish they would do.

would put pressure on the budget and give him an answer to the calls to spend more. Now one IGR wasn’t enough, so about every five years we get another IGR, which all seem to show doom and gloom. It is our five-yearly reminder that it would be reckless for the government to spend more on the things we want more of – or need.

This year’s report didn’t disappoint. Or it did, depending on who you ask. The main headlines out of it were declining population growth (because of COVID) and the predictions of budget deficits for the next 40 By international years. How can we have more spending on healthcare, or a standards, Australia is higher Age Pension, if we face a rich, low tax 40 years of deficits and an ageing population?

But that’s not what this IGR does. Instead, it’s designed to make Australians feel poor and afraid. People who are worried about the future are less likely to demand more spending on healthcare. They’re less likely to demand less spending on government services or an increase in the Age Pension. And that is exactly what the IGR is designed to do. To understand why we have an IGR, we must go back to 2002 when the first report came out. Back then, Peter Costello, treasurer in the Howard government, had a problem. He had too much money.

country. If the federal government wanted to spend more on pensioners, it could.

This might not seem like a problem until you understand that Mr Costello was in coalition with the National Party and it, along with some of his Liberal colleagues, were keen to spend that extra money – spend it on all sorts of things, such as health, education and increasing the Age Pension. Mr Costello didn’t like the idea of expanding the role of government. His solution to this was to produce a report that looked 40 years into the future. It was designed to show the problems of an ageing population. It was designed to show health cost blowouts and declining productivity. All these things 8

But let’s have a little dig into the assumptions behind these headlines. Are they really as bad as they look?

First the population decline. Or more accurately a decline in the expected future rate of population growth. To be clear, the population continues to increase each year. The IGR predicts it will almost reach 40 million by 2061. But the report claims that the population will be lower than it was previously forecast to be because of COVID. This should immediately strike you as strange. The growth in population is a factor of how many people are born minus those who die. But it is also determined by how many people come to Australia minus how many leave. The drop in the population is entirely because we have shut our borders to try to keep COVID out, which has dramatically reduced the number of migrants coming in.

YourLifeChoices Retirement Affordability Index™ August 2021

It is also really odd that Treasurer Josh Frydenberg should sound concerned about the drop in population growth. If the Treasurer is truly concerned about population growth, then he could ask the immigration minister to let more people in. And yet, Australian governments have spent billions of dollars over the past few decades trying to keep people out. If you dig into the assumptions in the IGR, we see that the government assumes we never make up for that lost migration by letting more people in after the crisis has ended. So, one of the supposed biggest problems out of the report is entirely solvable with the stroke of a pen. But what about these 40 years of deficits? Let’s put aside that the government struggles to forecast the budget position one year out, let alone 40 years out. As the old joke goes, macroeconomic forecasters exist to make astrologers look good. My apologies to all those astrologers out there for comparing you to economists. If you just read the IGR press release, you might think the reason for all those deficits was because of an ageing population and unsustainable spending on health. But that is not the real story. The IGR predicts continued growth in the population. It predicts wages will grow as well. Real wages per person (that is wages that account for inflation and population growth) are expected to be 80 per cent higher over the next 40 years.

If there are more of us and we’re all earning so much more, surely the government will have a lot more tax revenue to pay for any extra health spending? To find the answer to that riddle, you have to look beyond the press release and the Treasurer’s media appearances. You won’t even find the answer in the main report. You have to dig into the appendixes. There, you find the assumption that is driving all these deficits. The government is assuming that it will cut taxes every year from 2030 to 2061. Thirty-one years of tax cuts. If it didn’t cut taxes, then rising real incomes per person would mean more tax revenue and the IGR would be forecasting surpluses. Again, it is odd that the Treasurer seems concerned by this since these deficits could easily disappear if they didn’t cut taxes every year. You can’t scare people into accepting less spending on health if you have 30 years of surpluses. So instead, it assumes lots of tax cuts. By international standards, Australia is a rich, low tax country. If the government wanted to spend more on pensioners, it could. If it wanted to spend more on healthcare, it could. In a democratic society, these are the kinds of debates we should be having. If the Coalition wants fewer taxes and less spending, it should argue the case openly. Reports like the IGR should illuminate our options, not try to scare us into a predetermined course of action.

YourLifeChoices Retirement Affordability Index™ August 2021

Sponsored message from Challenger

The big three retirement risks (and how to protect yourself against them)

Does your retirement income plan – or lack of a plan – keep you awake at night? These may be the key flaws.

isk versus reward is a concept that’s all too familiar when approaching retirement. For example, should you risk retiring early, or continue to work (if possible) to boost the coffers for later in life?

market. Your safety net income can also include payments from the Age Pension (if you’re eligible).

Risk two: The value of your savings will go down over time (inflation risk)

There are three key risks tied to retirement income. These can often be underplayed, to the detriment of the security of your retirement income plan. And in 2021, in particular, it pays to have a plan that protects against these risks. Here’s how.

Risk one: You don’t know how long you’ll live (longevity risk) • A 65-year-old male has a 50 per cent chance of reaching 88.1 • People tend to underestimate how long they’ll live.

Even small increases to the cost of living over time can potentially have a significant impact on how far your money will go. An average annual inflation rate of 2.4 per cent Even small increases to might not seem like a big deal, the cost of living over but over the course of 30 years a $3 loaf of bread could double in time can potentially price. Without the right strategies have a significant in place, increases in inflation over time could mean your savings will impact on how far your no longer cover your living costs.

money will go.

Without the certainty of knowing how many years to plan for, it’s much safer to assume you’ll live well into your 90s. Doing this will give you a greater chance of ensuring you have enough income to last throughout retirement without having to rely solely on the Age Pension, which is unlikely to cover your basic living costs let alone such things as medical bills, aged care or in-home assistance.

How to protect yourself against this risk With potentially up to three decades and longer to plan for, retirement requires a greater focus on ‘safety net’ income to help you cover the essential costs of living. Income from investments such as shares usually isn’t guaranteed, and income from account-based pensions usually isn’t either.

How to protect yourself against this risk

Many retirement income products give you the choice to have your payments indexed to some measure of inflation. That means your payments will go up (or sometimes down) to keep pace with living costs. For example, Challenger lifetime annuities offer payments that keep pace with inflation or can be linked to the Reserve Bank of Australia (RBA) cash rate (whether it be an increase or decrease).

Income payments from the majority of accountbased pensions will stop once your initial investment runs out. Whereas ‘safety net’ income from a lifetime income stream will be paid to you however long you live, regardless of what happens in the share 10

• Something valued at $1 in 1990 would cost around $2 in 2020.2

Risk three: Poor returns on investments can eat away at your savings (share market risk) • The ASX200 dropped 37 per cent in early 2020, only to increase by 49 per cent by March 2021.3

1. Australian Life Tables 2015-2017 with 25-year mortality improvement factors from the Australian Government Actuary. 2. https://www.rba.gov.au/calculator/annualDecimal.html 3. https://www.abc.net.au/news/2021-03-16/covid-crash-markets-asx-wall-street-fomo/13250212

YourLifeChoices Retirement Affordability Index™ August 2021

• The share market volatility seen in the past 18 months can happen again. Exposure to investments such as shares comes with the risk of share market volatility. When investment returns are negative, your retirement savings are falling in value. If you need to make withdrawals from your savings or investments to pay for living expenses, it has a double blow for your overall financial position in retirement. It’s important to consider how best to minimise the impact on your savings from market volatility during a 20 to 30-plus year retirement period.

How to protect yourself against this risk Diversification is the golden rule of investing. Spreading investments across different asset classes can strike a balance between security (defensive assets) and higher investment returns (growth assets). This can reduce your overall investment risk and the impact of significant market downturns, or poor returns from a particular business or sector.

Is your retirement income diversified? Ensuring your retirement income is diversified can help manage the financial risks you face in retirement. Answering the five questions below will give you some idea as to whether you need to take another look at your retirement income plan: 1. Does your retirement income come from a range of different income sources?

2. If there’s a significant downturn in the markets, will your income still cover day-to-day expenses? 3. Does your retirement income portfolio bring you income certainty, balanced with greater returns? 4. Does your retirement income include both low risk and higher risk investments? 5. Do you have income that is guaranteed, no matter what happens? How did you go? As a general rule, the more questions you answered ‘yes’ to, the more diversified your retirement income is likely to be.

Securing your retirement income As we’ve seen in the past 18 months, things can change quickly and unexpectedly. Getting your retirement income sorted can help support a positive outlook in retirement. A Challenger lifetime annuity gives you a guaranteed monthly income, no matter how long you live, or how share markets perform. Find out more about Challenger lifetime annuities at www.challenger.com.au and use the Challenger Retire with confidence tool to discover how a comprehensive retirement income plan can support a positive outlook in retirement. DISCLAIMER: The information in this article is general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the relevant product’s Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au

YourLifeChoices Retirement Affordability Index™ August 2021

Most common Age Pension mistakes (and misunderstandings) There’s no question that the Age Pension is complicated. Ben Hocking tells why you may be missing out on valuable retirement income.

he process of applying for the Age Pension can be confronting and difficult. Even updating your information when your situation changes can be difficult.

When the older partner becomes eligible for the pension, you may wish to transfer money to the ineligible younger partner while that money remains exempt from the Age Pension means tests.

The YourLifeChoices inbox is flooded every week with queries and questions relating to specific details in the Age Pension process – some that are trickier than others.

Working it out

When we make our way through these emails, we find mistakes and misunderstandings that have cost pensioners a considerable amount of retirement income. Addressing these key problems may prevent you from making or repeating these common pension mistakes.

As long as your income is below the disqualifying income threshold (currently $2085.40 per fortnight for singles and $3192.40 for a couple combined), you can still be working and claim an Age Pension payment if you have reached eligibility age.

Coupling up Because the Age Pension requires the details of both the person applying and their partner, many people believe that both members of the couple need to have reached pension age to apply. This common misconception can prove extremely costly, as the age gap in some relationships can often be significant.

Leaving it too late

According to Services Australia, the median time to process a pension application is 49 days. But it can be a complicated process, so you don’t want to leave it until one Another costly mistake week before you reach pension age. is assuming that you

have to be retired to apply for the Age Pension.

When you reach Age Pension age and your partner has not, you will still be assessed under the income and assets test as part of a couple, and will receive the couple’s rate of Age Pension, one member eligible. However, you’ll still need to provide your partner’s identity and details, even if he or she is not old enough to apply for an Age Pension.

Not taking advantage of one person being eligible When one member of a couple is not of pension age, the other person may actually be eligible for a higher rate of pension. This is because any superannuation held in the younger partner’s name is not counted as an asset until they reach Age Pension age. 12

Another costly mistake is assuming that you have to be retired to apply for the Age Pension.

Retrospective payment of the Age Pension is limited to the date when the application is accepted as complete, not on notification of ‘intent to apply’.

If you would like your application processed quickly, you can register your intent to apply for the Age Pension 13 weeks before you reach eligibility age. You don’t need all the required documentation to get the application process started. You can register your intent to apply just by providing some very basic details. If you are already receiving an income support payment, expect a letter from Centrelink nine weeks before you reach eligibility age, inviting you to transfer to the Age Pension. You can do this online.

Ignoring requests for more information Delays in processing an Age Pension claim can occur if Services Australia is waiting for applicants to provide more documents.

YourLifeChoices Retirement Affordability Index™ August 2021

Also, if you have returned to Australia after living in another country, specifically for the purposes of claiming the Age Pension, then you need to remain in Australia for two years or your pension payment will stop. It is also important to note that you might not receive the full amount of the Age Pension if you retire overseas. Pension payments for those living overseas are paid at a proportional rate based on your Australian working life residence (AWLR). This is the number of years you have resided in Australia from age 16 to Age Pension age. If you have lived in Australia for 35 years (420 months), then you are paid the full rate of Age Pension to which you are entitled. If, for example, you have resided in Australia for only 20 years, then you will be paid 241/420 of the Age Pension (20x12 plus an extra month). If you fill out your application online, these requests will land in your myGov inbox. It is important to pay attention to these notifications and not ignore them. According to Services Australia, nearly 60 per cent of rejected claims are because an applicant failed to respond to requests for additional information or documentation.

Forgetting other benefits You might not qualify for an Age Pension, but your access to retirement assistance doesn’t end there. The first thing you should do is apply for a Commonwealth Seniors Health Care Card (CSHC). The CSHC is granted to those over Age Pension age who do not qualify for an Age Pension due to their income and assets, but whose income is below the threshold. The CSHC card entitles holders to discounts on PBS medicines and can also provide bulk-billed doctor benefits as well as concessions on electricity, gas, water, dental and public transport – depending on the rules in your state or territory.

Retiring overseas too early The dream for many – pre-COVID at least – is to retire overseas. This is possible, but if you are planning on funding your retirement overseas with the Age Pension, you need to plan carefully. You must reside in Australia when you claim the Age Pension. So, unless you are retiring to a country with a social security agreement with Australia, you need to be living in Australia at the time you apply for the pension.

Leaving retirement funds in the bank Some people believe that having savings in a low- to no-interest bank account will help their Age Pension application because they won’t be earning much income from interest. This is not how financial assets are treated by Centrelink. All your financial assets will have deeming applied, which means that they will be deemed to earn a certain rate of income, regardless of the actual return on your investments. If you are single, the first $53,600 of your financial assets are deemed to earn 0.25 per cent and anything over that is deemed to earn 2.25 per cent. If you are a member of a couple, the first $89,000 of your combined financial assets have a deeming rate of 0.25 per cent and anything over that is deemed to earn 2.25 per cent. This means you should be doing everything you can to make your retirement savings work for you, because if your investment return is higher than the deemed rates, the extra amount is not assessed as income. Even if you do not receive an Age Pension, Centrelink deeming rates may still be applied to your financial investments to ascertain your income and therefore your eligibility for a Commonwealth Seniors Health Card. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

YourLifeChoices Retirement Affordability Index™ August 2021

The way forward when the markets appear to be a wrecking ball Vanguard Australia strategist Robin Bowerman tells who sailed through a bumpy 2020 – so you’re prepared for the next crisis.

nyone with a healthy superannuation balance heading into retirement in February 2020 would have felt relatively confident they were both mentally and financially ready for the next chapter in life. But fast forward a few weeks and that confidence might have been shaken somewhat as financial markets quickly dipped into negative territory. Few forecasters could have foreseen the rapid market decline caused by COVID-19, leaving most investors with significantly diminished investment portfolios. And without a regular pay cheque contributing to their portfolios and supplementing these losses, retirees were most at risk. But was that really the case? We are very fond of reminding our investors to stay the course, particularly during a market downturn. And for good reason. While staying the course might sound like doing nothing to many, that actually isn’t the case. On a practical level, staying the course means sticking to the investment plan you put in place pre-retirement, and periodically re-evaluating your asset allocation to ensure it is aligned to your goals, time horizon and risk appetite. And while past performance is no guarantee of future results, hindsight has time and again taught us that those who moved to cash immediately after the March 2020 market crash subsequently missed the rebound a month later. Investors might have experienced relief at having exited the market’s volatile swings but that temporary emotional reprieve would have locked in those paper losses and then barred the investor’s portfolio from experiencing the ensuing market recovery, forfeiting the opportunity for portfolio values to be restored. At the time of writing, the ASX has well and truly recovered from last year’s low and is breaking alltime records. But rather than resting on laurels and assuming that everything is back to normal, now is the time for retirees (or those about to enter retirement) to think about the risks they now face, and seek out strategies to mitigate them. 14

Market risk As a retiree without a regular income to help make up for capital losses, market volatility undoubtedly delivers a heavier punch. This is where rethinking discretionary spending could help. While it isn’t an ideal solution, in a situation where you can control neither the market nor what it returns, your spending is an aspect that you can control. Reducing your spending slightly in step with your reduced portfolio balance might ease financial stress and help you navigate through the crisis. Once markets settle, then spending plans can be revisited.

Inflation risk With the prospect of rising interest rates on the horizon, inflation is quite a hot topic, but inflation risk is nothing new. Assuming that the cost of living increases by 3 per cent year on year for the next 30 years, your expenses will double in that time frame. As such, planning for inflation as part of your investment strategy and using ‘real returns’ rather than ‘nominal returns’ when looking at investment returns is key.

Longevity risk As medical advancements and technology improves, so has our quality of life and life expectancy. The average Australian can now expect to live at least to their mid-80s. Dexter Kruger was Australia’s oldest person until he died in July aged 111. Knowing this, factor in that if you retire at 67, your retirement savings may need to last you a minimum of 16 years and possibly up to 30 years and more. If you’re retiring before you turn 67, you’ll need to adjust your time horizon accordingly. Also, you should plan for the possibility of health issues as you age, and direct discretionary expenses previously allocated to hobbies and travelling towards healthcare expenses.

Emotional risk As mentioned earlier, the best course of action during periods of market volatility is to tune out the noise of everyday headlines and stay the course. If the March 2020 volatility was too much for you to bear, perhaps

YourLifeChoices Retirement Affordability Index™ August 2021

The total returns approach The alternative to an income-oriented strategy is the total returns approach, where a portfolio’s asset allocation is set at a level that can sustainably support the spending required to meet those goals and encourages the use of capital returns when necessary.

your tolerance for market risk is not as high as you thought. Now would be a good time to reassess your risk tolerance and consider a tilt towards more defensive products such as bonds, to help protect your portfolio from the next inevitable dip. And if doing this on your own sounds too hard, consider seeking out the advice of a financial adviser. The value of a trustworthy adviser is most evident during periods of market volatility and not solely because of your portfolio returns. The emotional support provided during a period of anxiety is invaluable and should not be measured purely in dollar terms. Finally, with the prospect of low yields and muted returns for the foreseeable future, it can be tempting to allocate more of your investment portfolio to equities, in a bid to meet your spending needs. But consider that you will be greatly elevating your portfolio risk at what is probably the most conservative phase of your investment journey. Instead of tilting your portfolio towards value stocks, perhaps consider the use of a total returns approach instead of relying on dividends to deliver income. In 2020, disciplined investors were rewarded for remaining invested in the financial markets, despite troubling headlines and a challenging environment. It would be prudent to maintain this discipline and long-term focus for the years ahead.

It is a strategy that looks at all sources of return from your portfolio, both income and capital – first assessing an individual or household’s goals and risk tolerance, and then setting the asset allocation at a level that can sustainably support the spending required to meet those goals. Unlike an income-oriented strategy, which generally utilises returns as income and preserves capital, the total-return approach encourages the use of capital returns when necessary. During periods where the income yield of a portfolio falls below an investor’s spending needs, the capital value of the portfolio can be spent to make up the shortfall. As long as the total return drawn from the portfolio doesn’t exceed the sustainable spending rate over the long term, this approach can smooth out spending during the volatile periods for markets that inevitably occur. Of course, it may also require the discipline to reinvest a portion of the income yield during periods where the income generated by the portfolio is higher than the sustainable spending rate. It should be noted that while capital returns – best represented by the price movement of shares – can be a volatile component of this strategy, taking a long-term view is paramount. Robin Bowerman is head of market strategy and corporate affairs at Vanguard Australia and a passionate advocate for Vanguard’s education centre. General information disclaimer: This article includes general information and is intended to assist you.

YourLifeChoices Retirement Affordability Index™ August 2021

It’s your money – here’s how to make sure it’s working hard for you Set and forget is not a smart option when it comes to super. SuperRatings insights manager Camille Schmidt tells how to make every dollar work as hard as possible.

or many Australians, superannuation comprises an increasingly large share of their wealth and will be one of their biggest assets at retirement – often second only to the family home (for those who are lucky enough to own a property). Therefore, it’s important to take advantage of a range of strategies to get the most out of your super. With the new financial year upon us, now is an important time to check your super settings. Many Australians don’t take full advantage of the services and tools available through fund websites, yet there are significant benefits for members.

Selecting a good fund Selecting a good super fund, or doing some research to determine whether the fund you are in may be considered a good fund, is important. At SuperRatings, we’ve been researching superannuation funds for almost two decades and have developed and refined our methodology as funds become larger and more complex. We’ve done the hard work by considering more than 300 items – such as fund investment performance, how much they charge, insurance cover and costs involved – and then comparing and rating them. This information is available at SuperRatings Top 10. We also consider the advice services on offer as being crucial in helping members achieve their retirement goals. However, we continue to see only a small number of Australians accessing these services. The majority of funds provide education services to help make sense of it all, and we have seen a rise in webinars covering the basics of super and money tips as lockdowns become the new norm. Finally, we also consider governance of a fund to be important, as it ensures members’ funds are being managed appropriately. When selecting pension (or decumulation) products, there are some different features to those in the 16

YourLifeChoices Retirement Affordability Index™ August 2021

accumulation phase. We have developed a specific method to assess pension products with a greater focus on the flexibility given to members to access their funds – such as the payment options available, ranging from weekly to annual, and the ability to choose a specific day of the week to be paid. Provision of retirement planning services, including estate planning and a range of beneficiary types, is also viewed favourably. In our latest review, we rated more than 440 superannuation products and over 170 pension offerings. Our product ratings are accessible here. The government has also been collecting and sharing information relating to superannuation funds’ performance and fees through its heatmap initiative. The heatmaps highlight MySuper products, those your employer can place you in when you don’t select a fund, which are deemed to be expensive and underperform compared with their peers. Through the Your Future, Your Super reforms announced in the 2020-21 Federal Budget, a new YourSuper comparison tool has been developed to compare MySuper products. The Australian Prudential Regulation Authority (APRA) will also conduct an annual performance test of funds to identify those that aren’t delivering for their members.

Most funds will have a risk profile calculator on their website to help determine which investment option is most suitable for someone with your age and risk profile.

is most suitable for someone with your age and risk profile. Long-term strategy remains key to realising the long-term outcomes on which super fund members will rely for their retirement. The table below provides a summary of performance for capital stable options based on pension products, to provide an indication of the range in performance outcomes across the market. The top quartile indicates the best performing funds, the bottom quartile is the cut-off for the lower performing funds, and the median represents funds that sit between best and worst performers. The table shows that there is a considerable range in performance across the market, with the top 25 per cent of funds generating a return of 6.6 per cent or more over 10 years, compared to 5.6 per cent or less for the bottom 25 per cent of funds in the market. A 1 per cent difference in performance over the long term can have a significant impact on your final balance due to the benefits of compounding over time. Pension return benchmarks – capital stable options

1 Year

3 Years

5 Years

7 Years

10 Years

Top quartile

9.6%

5.5%

5.8%

6.6%

Median

8.5%

5.1%

5.3%

5.2%

5.9%

Bottom quartile

7.4%

4.6%

4.7%

5.6%

* As at 30 June 2021. Based on SuperRatings’ SRP50 Capital Stable (20-40) Index containing pension options with growth asset ratios of 20% to 40%. * Returns are net of investment fees, tax and implicit asset-based administration fees. Annualised returns for each period are shown.

The next table is a summary of performance for balanced options based on superannuation products for members who are in the accumulation phase. Accumulation return benchmarks – balanced options

1 Year

3 Years

5 Years

7 Years

10 Years

Spotlight on investments

Top quartile

19.0%

8.3%

9.3%

8.5%

8.9%

The type of investment option your super is invested in has a significant impact on your final balance at retirement. It has been a challenging year for superannuation fund members, with the ups and downs causing many people to worry about their superannuation and the falls in their balance – particularly around February-March 2020 during the onset of the COVID-19 pandemic.

Median

17.8%

7.9%

8.7%

8.0%

8.3%

Bottom quartile

16.9%

7.3%

8.1%

7.5%

8.0%

* As at 30 June 2021. Based on SuperRatings’ SR50 Balanced (60-76) Index containing superannuation options with growth asset ratios of 60% to 76%. * Returns are net of investment fees, tax and implicit asset-based administration fees. Annualised returns for each period are shown.

Strategies to boost your super

In general, to reach retirement goals, you need some exposure to shares and shouldn’t get caught up in the short-term noise. Be careful if you consider switching to cash during a downturn as you will be locking in the fall in performance. Most funds will have a risk profile calculator on their website to help determine which investment option

1. Consolidate Historically, it has been possible to have multiple super accounts, which means multiple accountkeeping fees. One of the easiest steps to maximise your super is to consolidate your accounts into one provider. But before doing that, it’s important to check your insurance as you may prefer the cover through one particular account.

YourLifeChoices Retirement Affordability Index™ August 2021

• Spouse contributions: You may be eligible to make a contribution on behalf of your spouse who is not working or classified as a low-income earner and claim a tax offset of up to $540.

Multiple accounts won’t be an issue from 1 November 2021. From that date, if an employee doesn’t choose a fund, most employers will need to place super guarantee payments into the employee’s existing account. This reform is known as ‘stapling’ and means members should not end up with multiple accounts when they change jobs.

2 3

2. Lost super You can also search for ‘lost’ super accounts, which are accounts that have been transferred to the Australian Taxation Office as they were considered inactive and had low balances. More information can be found here.

3. Contributions In addition to receiving contributions from your employer, individuals can boost their super by: • Salary sacrificing: This involves arranging with your employer to pay some of your salary/wage into your super fund. The benefit is that these payments are taxed at a maximum rate of 15 per cent, which is often lower than your marginal tax rate. • Personal contributions: Individuals can boost their super by adding their own contributions into their super fund using their take-home pay and then claiming an income tax deduction. These types of contributions are capped at $27,500. You can find more information here. • Government contribution: The government also makes a super co-contribution for low or middle-income earners of up to $500. This is automatically paid to your super fund if you’re eligible. 18

There are also mobile apps that allow you to round up the cost of your purchases with the rounded up amount deposited in a nominated account. You could then put the additional savings into your super by making a personal contribution. Every little bit helps! When considering whether to make additional contributions to your superannuation, it’s important to assess your personal situation and the tax implications. We encourage members to contact their superannuation fund or a trusted financial adviser to ease their minds.

4. Advice If you are unsure about your superannuation offering and would like support, we suggest you contact your fund to see what services are available. If you wish to find a financial adviser, the government provides information on how to select a financial adviser through the MoneySmart website. Take the time to check the settings for your superannuation to be confident your retirement nest egg is on track to provide you with the lifestyle you desire. Camille Schmidt is market insights manager at SuperRatings. She has a PhD in finance from Macquarie University. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

YourLifeChoices Retirement Affordability Index™ August 2021

Government update YourLifeChoices keeps you up to date with government changes that could affect your retirement. Age Pension changes from 1 July The Age Pension eligibility age went to 66.5 years for people born between 1 July 1955 and 31 December 1956 inclusive. It will go to 67 on 1 July 2023. There was an increase to income and asset limits in the annual indexation measures applied to the means tests. Pensioners receiving a part rate benefit from the increase because the amount of income and assets allowed before their payment is affected has increased. The income-free limit for singles receiving the Age Pension, Disability Support Pension and Carer Payment increased by $2 to $180 per fortnight, which will increase their payment by $1 per fortnight, and for couples combined to $320 per fortnight – a $4 increase. Assets thresholds also increased. A pensioner couple who own their home can now have up to $405,000 (excluding the home) before it affects their rate of payment, up from $401,500. That flows through to increase their payment by $10.50 per fortnight. The disqualifying asset thresholds also increased, which increases the number of Australians who may become eligible to receive a pension payment. You can find more detail about the new payment rates and thresholds here.

Super changes from 1 July • The super guarantee increased from 9.5 per cent to 10 per cent. It will rise to 12 per cent by July 2025. • The government launched a new online fund comparison tool, YourSuper, to make it easier to choose a good fund. • The maximum number of allowable members in self-managed superannuation funds (SMSFs) and small APRA funds increased from four to six. • The annual concessional contribution cap (pre-tax salary sacrificed contributions to super) increased from $25,000 to $27,500. • The annual non-concessional cap increased from $100,000 to $110,000 (after-tax savings added to super). For people aged 65 and 66, the bringforward arrangements were extended for all contributions made on or after 1 July 2020.

• The total super balance and the transfer balance cap both increased from $1.6 million to $1.7 million. • Super products must meet an annual performance test. Products that fail will be required to inform members and those that consistently underperform will no longer be able to take on new members. Members will be notified by 1 October 2021 if their fund fails this test. • Trustees must act in the best financial interest of members and provide better information on how they manage and spend members’ savings in advance of Annual Members’ Meetings and through enhanced Portfolio Holdings Disclosure. • From 1 November 2021, your super fund will follow you to new employment. This has been dubbed ‘stapling’ and will avoid the creation of unintended multiple super accounts when employees change jobs.

Tax time Employers have to disclose employees’ Pay As You Go (PAYG) information to the Australian Tax Office (ATO) no later than 14 August. If you’re doing your own tax returns, 1 November is the very latest you can lodge them. You usually have until 31 October, but this year that falls on a Sunday so you have an extra day to file. And if a tax agent is doing your taxes, you have until this day to file with your agent. If you miss this cut-off, you risk being fined. Your tax agent has until 16 May 2022 to lodge on your behalf.

YourLifeChoices Retirement Affordability Index™ August 2021

You’ve got a lot of living to do in retirement. Are you confident you can pay for it?

Retirement can be a risky business

Articles inside

Government reports just a scare tactic?

It’s your money – make it work hard

Winners and losers when markets are savaged

The big three retirement risks

Most common Age Pension mistakes

How to ensure you won’t enjoy retirement