Retirement Affordability Index March 2018 by YourLifeChoices

ISSUE 5

MARCH 2018

Retirement Affordability Index March 2018

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Housing costs hurt the most across 12 months PLUS: What you said in our financial literacy survey www.yourlifechoices.com.au

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Contents

Published by: Indigo Arch Pty Ltd Publisher: Kaye Fallick Editor: Janelle Ward Copy Editors: Haya Husseini, Olga Galacho Writers: Matt Grudnoff, Kaye Fallick, Olga Galacho, Vitaliy Tsitalovskiy, Lynne Dorney, Janelle Ward Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9885 4935 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 Indigo Arch Pty Ltd 2018

What you told us Are you confident with your finances? What do you find confusing? We reveal your Financial Literacy Survey responses

Household cost-of-living increases Spending estimates in key areas for each retirement tribe in the December quarter

Track your household spending We make it easy for you to calculate where your money is going

Annuities explained An annuity can help you manage your retirement income

The costs that hurt the most in 2017 The Australia Institute senior economist Matt Grudnoff singles out the four main culprits

Making sense of financial contracts You told us that mobile phone plans were hard to understand but what was the product that really baffled? Olga Galacho reveals all

Is downsizing your ‘get-out-of-jail’ card? 14 Almost 40 per cent of respondents to our Financial Literacy Survey said it was. Kaye Fallick examines the pros and cons of downsizing So who needs a financial adviser? Financial planner Vitaliy Tsitalovskiy explains how his profession can help you

Superannuation is a ‘minefield’ Lynne Dorney has worked for 40-plus years but struggles to understand the detail when it comes to superannuation

Are you prepared for retirement? The YourLifeChoices RetirePlanner™ tool helps you plan and calculate your retirement income

Government update What’s changed and what’s about to change?

4 6 12 16 19

YourLifeChoices Retirement Affordability Index™ March 2018

Financially literate? ‘Yes we are’ A large number of YourLifeChoices members are very confident when it comes to money matters, according to our survey. Janelle Ward presents the findings.

re you financially literate? How would you rate your level of financial literacy? We recently invited YourLifeChoices members to participate in our Retirement Income and Financial Literacy Survey. In just three weeks, 5064 members responded. We had several aims. One was to understand our members’ degree of financial literacy. Did they manage their own financial affairs? If so, how well and with what degree of comfort and success? We also sought feedback on key financial fronts, including the adequacy of the Age Pension and understanding of products such as health insurance and energy and phone plans, to gauge which issues were causing most concern. We learnt a lot about our members. But first, how to define financial literacy? Financial literacy is the ability to understand how money works, how someone makes, manages, invests and spends it wisely – or has the nous to employ a financial adviser and/or accountant to perform some of these tasks. Does that describe you? The survey indicates that many respondents would say, ‘Yes, it does’. A massive 86 per cent said they managed their own financial affairs. Just over 70 per cent said they had managed their finances in the past few years either well (50.4 per cent) or very well (20 per cent). Sixtythree per cent said they understood their finances and investments well (50.5 per cent) or very well (13 per cent). More than half (52 per cent) said they were either confident or very confident about their long-term future. But for some retirees, could self-confidence – and perhaps a distrust of the financial services sector, given the events that prompted the banking royal commission – mean that they are missing out on maximising income and savings? Could it sometimes be a case of not knowing what you don’t know? The Australian Securities and Investment Commission (ASIC) says: “Advisers mostly add value by helping you sort out your financial goals and working with you to develop a plan to achieve them over time. 4

“Most importantly, working with an adviser will help you turn thought into action, especially if you tend to put things off.” Joe Stephan, Director at Stephan Independent Advisory, told YourLifeChoices that clients often remarked they weren’t aware certain strategies existed. He said financial planners regularly reviewed plans to adjust the impact that outside forces (legislative and market changes) could have on them. “If you choose to manage your own affairs,” he says, “how much time will you spend reviewing all aspects of your strategies? How accurate, non-conflicted or detailed would your reviews be? How effective and confident will you really be with your own review?” The counter argument was summed up by James Shipton, the Chair of ASIC: “… financial services is one of the least trusted industries. We need confidence that the people in banking, insurance and funds management will keep their promises, act in our interests and live up to community expectations. We also need to trust that directors, auditors, mortgage brokers and financial planners will do their jobs with competence and honesty.” The YourLifeChoices survey also canvassed your concerns in other key areas. Eighty-six per cent of respondents said the Age Pension was either too low or far too low for a ‘reasonable retirement’. Seventy-two per cent said they had private health cover, but 25 per cent said their health insurance bill was the single biggest challenge to being able to live within their budget. Fifty per cent said health insurance policies were too complicated to understand properly. Energy costs (18 per cent) were the second biggest challenge, followed by housing (17 per cent). With the main political parties already jostling ahead of the 2019 federal election, a banking inquiry in full swing, downsizing legislation taking effect from 1 July and costs always heading north, we’re here to keep you informed. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018

What the Retirement Income and Financial Literacy Survey* told us about you Which best describes where you live?

Health insurance is too complicated to understand properly. Own your own home outright 68%, own your home with a mortgage 16%, rent 11%

Do you manage your own financial affairs? Yes 86%, no 14%

How well do you think you have managed your financial affairs over the last few years? Well or very well 71%, poorly or not well 9%

How well would you rate your current understanding of finances and investments?

Agree or agree strongly 50%, disagree or disagree strongly 27%

Well or very well 63%, poorly or not well 9%

What is the single greatest challenge to your ability to live within your income?

The Age Pension entitlements are too complicated to understand properly.

Health insurance 25%, energy 18%, housing costs 17%, health bills 11%

Agree or agree strongly 46%, disagree or disagree strongly 27%

Superannuation is too complicated to understand properly. Agree or agree strongly 41%, disagree or disagree strongly 33%

What are your preferred strategies to stretch/supplement your retirement income? Downsize 39%, annuity 11%, reverse mortgage 4%

Do you have private health insurance? Yes 72%, no 28%

Do you or your partner own shares? Yes 46%, no 53%

Is it time the family home became part of the assets test for an Age Pension? Yes 21%, no 70% * 5064 respondents YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Indexâ&#x201E;˘ March 2018

Transport, food drive cost increases

ousehold costs for retirees on either a full or partial Age Pension (Constrained Couples and Singles and Cash-Strapped Couples and Singles) and self-funded retirees (Affluent Couples and Singles) rose 0.6 per cent in the December quarter of 2017. The Australian Bureau of Statistics (ABS) reported that the main contributors to the rises were transport (+3.3 per cent for pensioners and +2.3 per cent for self-funded retirees) and food and non-alcoholic beverages (+1.4 per cent and +1.2 per cent). The rise in transport costs was driven by automotive fuel with all fuel types posting cost increases during

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 6

Affluent Couples

the quarter. The rise in food and non-alcoholic beverages was driven by higher fruit costs, particularly strawberries and grapes. A drop in the overall cost of health (-1.7 per cent) offset the rises for Constrained and CashStrapped Singles and Couples. This was driven by pharmaceutical products as a result of the cyclical increase in the proportion of consumers exceeding the Pharmaceutical Benefits Scheme (PBS) safety net. The most significant partial offset for the quarter for Affluent Singles and Couples was furnishings and household equipment (-1.2 per cent) driven by strong discounting activity in the retail sector.

Constrained Couples

CashStrapped Couples

Affluent Singles

Constrained Singles

CashStrapped Singles

Couple Couple Single Single Single who Couple who homeowners homeowners homeowner homeowner rents on Age rent on Age with private on Age with private on Age Pension Pension income Pension income Pension $179.32 $105.99 $200.73 $120.49 $88.93 $158.14 13% 13% 29% 15% 20% 36% 44.62 $33.51 $35.38 $32.27 $28.89 $24.52 3% 4% 5% 4% 6% 6% $233.43 $164.41 $148.67 $117.27 $82.43 $73.87 16% 20% 21% 14% 18% 17% $51.75 $25.43 $40.56 $25.13 $14.16 $19.20 4% 3% 6% 3% 3% 4% $30.85 $17.51 $9.26 $20.52 $8.90 $7.34 2% 2% 1% 3% 2% 2% $73.08 $31.71 $19.29 $39.99 $18.57 $14.81 5% 4% 3% 5% 4% 3% $41.69 $29.50 $15.93 $37.62 $21.26 $11.30 3% 4% 2% 5% 5% 3% $137.75 $98.18 $33.99 $79.09 $35.03 $20.72 10% 12% 5% 10% 8% 5% $187.75 $121.88 $57.95 $99.46 $50.72 $34.21 13% 15% 8% 12% 11% 8% $38.13 $27.02 $29.24 $36.90 $19.05 $14.86 3% 3% 4% 5% 4% 3% $292.33 $99.27 $64.55 $136.16 $51.22 $30.91 20% 12% 9% 17% 11% 7% $0.57 $0.21 $0.00 $0.12 $0.11 $0.01 0% 0% 0% 0% 0% 0% $29.05 $17.63 $12.25 $18.10 $9.55 $8.46 2% 2% 2% 2% 2% 2% $87.64 $47.26 $23.64 $53.19 $25.89 $16.13 6% 6% 3% 7% 6% 4% $1,427.97 $819.50 $691.43 $816.31 $454.70 $434.48 $6,187.86 $3,551.17 $2,996.22 $3,537.32 $1,970.35 $1,882.76 $74,254.32 $42,614.07 $35,954.59 $42,447.86 $23,644.19 $22,593.08

YourLifeChoices Retirement Affordability Indexâ&#x201E;˘ March 2018

How does your spending compare? Expenditure items

Affluent Couples

Constrained Couples

CashStrapped Couples

Affluent Singles

Constrained Singles

Single Single Couple Couple Couple who homeowner homeowner homeowners homeowners rent on Age with private on Age with private on Age Pension income Pension income Pension

CashStrapped Singles Single who rents on Age Pension

Housing Rent, interest, home repairs and maintenance & body corporate fees As percentage of expenditure Domestic fuel & power Electricity, gas & oil As percentage of expenditure Food & non-alcoholic beverages Includes meals in restaurants As percentage of expenditure Alcoholic beverages & tobacco products Alcohol consumed at licensed premises As percentage of expenditure Clothing and footwear Dry cleaning, repairs & alterations As percentage of expenditure Household furnishings & equipment Outdoor furniture, floor and window coverings, linen and bedding, appliances, glassware, tableware and cutlery, tools & mobile phones As percentage of expenditure Household services & operation Cleaning and garden products, phone charges (including mobile), pest control & home cleaning services As percentage of expenditure Medical & health care Health insurance, doctor and dental fees, medicines and pharmaceutical products, prescriptions & hospital and nursing home charges As percentage of expenditure Transport Purchase, maintenance and insurance of vehicles, fuel & public transport fares As percentage of expenditure Communication Spending on telephone (including fixed line and mobile) Spending in internet services As percentage of expenditure Recreation AV equipment including TVs and pay TV, books, newspapers and magazines, camping and fishing equipment, sports equipment, internet charges, holidays & animal expenses As percentage of expenditure Education Primary and Secondary school fees (including school sport fees) TAFE and University fees (including HELP) Fees to all other private education institutions As percentage of expenditure Personal care Toiletries, cosmetics & hairdressing As percentage of expenditure Miscellaneous goods & services Stationery, watches and jewellery, interest payments on credit cards and all loans (excluding home loans), education, rates and charges on investment properties, accountant and tax fees & cash gifts As percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure

YourLifeChoices Retirement Affordability Indexâ&#x201E;˘ March 2018

Sponsored message from Challenger

The story of Josh and Deb Josh and Deb have been looking forward to their retirement for many years. Now they’ve both turned 67 and retired, they’ve calculated how much they think they will need to spend each year.

Josh and Deb: retirement profile Age

Both 67

Combined savings

$500,000 in superannuation and $50,000 in cash

Essential annual expenses

About $42,000

Target annual income

$60,000

Some travel, socialising more with their friends and eating out more often are just a few of the freedoms Josh and Deb have been hoping for in their retirement. However, they’re aware the bills still need to be paid and they don’t want to have to worry about these during their valuable years in retirement. After speaking to their financial adviser, he recommends supplementing their Age Pension (from which they receive $20,792 in the first year of retirement) by investing $75,000 each of their savings into guaranteed lifetime annuities, providing them with a secure income of $8,202 per year (indexed each year to rise with inflation) for the rest of their lives. Knowing they have the security of this combination for the rest of their lives, even if all their other assets run out, gives Josh and Deb the freedom to invest $350,000 of their savings into a range of investments via account-based pensions. They will draw the first year’s payment of $29,006 from these pensions, giving them flexibility and liquidity. Including the income earned on the money they have in the bank, Josh and Deb’s total income received in the first year of their retirement is $60,000. They have achieved the target annual retirement income they are looking for. Speak to your financial adviser or visit the Challenger website to find out more. Please note: The case study relates to a hypothetical couple and is provided for illustrative purposes only. This case study is not intended to reflect any particular person’s circumstances. Centrelink rates and thresholds are as at 20 March 2018. Challenger Guaranteed Annuity (Liquid Lifetime) is based on a quote as at 20 March 2018, purchased with superannuation money, using the Flexible Income option with standard death benefit, maximum withdrawal periods and monthly payments which are indexed annually with inflation providing a first year payment of $4,208 to Josh and $3,994 for Deb. 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™ March 2018

The costs that hurt you the most in 2017

Senior economist with The Australia Institute Matt Grudnoff looks at the bigger picture in cost-of-living increases for our tribes.

rice rises in the things we buy are common to all households, but will affect different groups in different ways. Costs may be easily absorbed by some YourLifeChoices tribes, while other tribes may struggle to make ends meet.

The overall difference varied from 1.3 per cent to 1.8 per cent. The accompanying table shows the impact on each tribe. Also included are significant price decreases when these falls were 0.2 per cent or greater for the year.

The March issue of the Retirement Affordability Index™ applies the Consumer Price Index (CPI) figures from the December quarter to assess the broader impact on the six retirement tribes: Affluent Couples, Constrained Couples, Cash-Strapped Couples, Affluent Singles, Constrained Singles and Cash-Strapped Singles.

Let’s now look at each of the four categories as well as the offsetting categories.

In recent issues, we have focused on the impact of quarterly price rises rather than look at the bigger picture. Because the latest figures complete the 2017 calendar year, it is an ideal time to look at what happened to each tribe across the 12-month period – the prices that went up in 2017 and those that went down. Most importantly, we will assess how these changes in prices affected our different tribes in different ways.

‘Petrol price increases usually receive plenty of media attention, but for some reason, they flew under the radar this year.’

The hot topic, when it came to price rises in 2017, was energy. Almost all of the electricity price increase was in the September quarter (July, August and September). The rises were debated, criticised and defended. The topic was only knocked out of the news by an even bigger discussion – the nationalities of our parliamentary representatives. The impact of the electricity and gas price rises was different for each tribe. They were most keenly felt by Cash-Strapped Singles and Couples, that is, retirees who rent. The energy rises contributed half a per cent to each. These two tribes were more heavily affected because of their lower income compared with other tribes and because electricity is a daily essential.

One way to do this is to look at price rises as a percentage of expenditure in key categories.

Another big price increase in 2017, and one which received surprisingly little attention, was the jump in transport costs driven mainly by rising petrol prices. This was most obvious at the start and end of the year. Petrol price increases usually receive plenty of media attention, but for some reason they flew under the radar this year.

For example, Constrained Couples experienced an overall 1.6 per cent rise in their cost of living. Health had the biggest impact, accounting for 0.5 per cent of the 1.6 per cent rise.

Transport price increases had a big impact on all tribes but had the biggest effect on Constrained Couples. If petrol prices stay high – or increase further – then expect them to gain more attention.

If we look at the top four contributors for each of the tribes – medical and healthcare, transport, housing, and domestic fuel and power – we discover that the same categories are common to each. But there are big differences in how much each category affected each tribe’s bottom line.

Another price increase that continued to climb at a steady but relentless pace was housing. Unlike electricity, costs associated with housing were not isolated to one or two quarters. Rather, they rose consistently each and every quarter, and when we look at the increases across the year, we can see they had an impact on all tribes.

YourLifeChoices Retirement Affordability Index™ March 2018

The key categories that affected tribes’ expenditure in 2017

Affluent Couple

CashStrapped Couple

Constrained Couple

Couple Couple Couples who homeowners homeowners rent on Age with private on Age Pension income Pension Medical and health care Transport Housing Domestic fuel and power Household furnishings Communications Total

Affluent Single

Constrained Single

CashStrapped Single

Single homeowner with private income

Single homeowner on Age Pension

Single who rents on Age Pension

0.4%

0.5%

0.2%

0.4%

0.3%

0.2%

0.4%

0.5%

0.3%

0.4%

0.3%

0.6%

0.3%

0.4%

0.8%

0.3%

0.4%

0.3%

0.5%

1.6%

1.8%

-0.2%

-0.2% -0.2%

1.3%

1.6%

However, by far the biggest impact was on CashStrapped Singles. This tribe felt a massive 0.8 per cent increase for the year – the largest for any tribe. Why? Because of the amount this tribe spends on rent as a proportion of income. The second biggest impact was on CashStrapped Couples, who experienced a 0.6 per cent rise, again because of the proportion of income spent on rent.

1.4%

Singles. This was mainly driven by falls in the price of computing and technology products. Communication also had a positive impact on Affluent Singles, decreasing their cost of living by 0.2 per cent. All the other tribes experienced much smaller drops. As you can see, from the same price rises we get very different cost-of-living increases – all because our tribes have different spending in different areas.

The fourth key category responsible for cost-of-living increases was health.

Overall, the Affluent tribes saw increases of 1.3 and 1.4 per cent respectively in their total spending.

The most affected tribe was Constrained Couples, many of whom have private health insurance. Health was also the biggest contributor to the rise in cost of living for the Affluent tribes. Affluent tribes spend a far larger proportion of their income on health than the other tribes, considerably more than the CashStrapped tribes.

The Constrained tribes saw increases of 1.6 per cent and the Cash-Strapped tribes increases of 1.6 and 1.8 per cent in their total spending.

There were price drops in a number of categories over the year. The Affluent tribes spent enough in these categories so that it decreased their cost of living by 0.2 per cent. Household furnishings had a significant impact on both Affluent Couples and

The other key contributing factor was that the Affluent tribes consumed more of the things that actually went down in price. This limited the impact of the increase in their cost of living.

Electricity price rises were important and petrol price increases were the sleeper issue. But the category that had the biggest effect was the cost of housing.

YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018

A painful conclusion You told us that mobile phone and energy plans were hard to understand, but which product was the most difficult? Olga Galacho reveals all.

ourLifeChoices asked you, our members, whether provider plans for health insurance, superannuation, mobile phone services and energy plans were unnecessarily complicated. Your clear response was that they most definitely were. In our latest Retirement Income and Financial Literacy 2018 survey, half our members told us that health insurance policies were too complex for them to understand. In fact, of all provider plans, health insurance was seen as the most difficult to navigate. Just 27.5 per cent of members felt comfortable with their level of understanding of their health insurer’s policy. Given that 72 per cent of our members say they have private health insurance, the number who consider their policies unnecessarily complicated is significant.

From the responses to our survey, YourLifeChoices has identified that health insurance is a pain point for retirees. They consider it a matter of ‘damned if you do buy a policy and damned if you don’t’.

‘Before switching health insurance companies to reduce your premium, understand what you are currently covered for.’

While some policyholders resign themselves to ‘trusting’ their insurance companies – in part because of the challenges of shopping around for a better deal – the fact remains that many are very unsure if the product they have purchased is fit for their purpose. A YourLifeChoices investigation late last year into the various comparison sites that claim to give consumers the ability to assess plans and policies found that many are fronts for a select group of providers. Read the small print and you will find they are not impartial and thus cannot offer consumers unbiased comparisons across all products. Governments keep telling Australians to shop around for better deals on their plans, but sadly, shopping around doesn’t always give you the best consumer choices. Worse, many comparison sites are set up as business models to create revenue from consumers’ interactions with them. Apart from government-sponsored sites, comparison companies are not providing a community service without strings attached. 12

The sites are often paid for sharing market research data with third parties, for hosting financial calculators and other tools, and they collect commissions per click and licensing fees for displaying badges ‘awarded’ to top providers. At each step as you click on an option for more information about products, the sites may be charging the providers a commission.

So, what can you do about getting impartial information on better health insurance that doesn’t catapult you towards a narrow selection? The best place to start is with the Federal Government’s website: PrivateHealth.gov.au. It explains why health insurance policies could benefit you and allows you to compare policies from different providers in what is, at the moment, the most transparent tool available to consumers. However, before switching health insurance companies to reduce your premium, understand what you are currently covered for. Closely examine what other insurers cover before you jump ship because it is likely that not all services will be eligible for rebates with an alternative provider. Respected industry sources told YourLifeChoices that several years ago, many policies had fewer restrictions and exclusions than they have today. Those legacy policies may have covered heart surgery, cataract operations, joint and hip replacements and dialysis. Newer, entry-level policies that are less expensive are unlikely to cover many treatments that older Australians may need in the future. The sources said that a person with a legacy policy might be best advised not to

YourLifeChoices Retirement Affordability Index™ March 2018

HEALTH COVER CHANGES YOURLIFECHOICES MEMBERS WOULD LIKE • Easier access to private hospital and shorter waiting periods. • No gap, reduced premiums especially for long-term customers. • Cost should be reduced in proportion to length of membership. • Large discounts when you have had cover (and few claims) over many years. • Cheaper rates for over-60s if they have been in private cover for a long time. • Link annual rises to CPI. • Reduce premiums for proactive healthy people. • Limit medical fees to the scheduled fee. • No more rate increases or discounts if you don’t claim. • No out-of-pocket gaps. • Let us choose what services we need. switch, in case he or she finds down the track that certain conditions and treatments are excluded. However, consumers should not assume that they will continue to be covered by a legacy policy indefinitely. Insurers can decide to drop cover that you previously enjoyed at any time, and more of them are doing this. Fortunately, the Federal Government is onto this and has asked the Ombudsman to look into why major providers are making changes to their ‘contracts’ with policyholders. Another potential pitfall for members trying to get a reduced premium by requesting that obstetrics be dropped from their policy is the loss of cover for unrelated conditions. For instance, a request by an older health fund member to drop obstetrics cover received a surprising response. The woman was told that if obstetrics was removed she would also have to forfeit benefits for other therapies not linked to childbirth. Those therapies included osteopathy, physiotherapy and several treatments that would have benefitted her as she aged. In the latest move to try to put a ceiling on huge spikes in premiums, the Turnbull Government allowed a raft of concessions that will help insurers dodge rebates for many therapies that could

potentially benefit elderly policyholders. Some of the therapies may have helped keep retirees out of doctors’ waiting rooms and hospitals. This green light from the Government will not reduce the cost of health insurance for the consumer. It will reduce the cost of providing a comprehensive insurance for the insurer. Our premiums increased by an average 3.95 per cent on 1 April. A little less than the increase last year and the year before, but still a considerable extra cost for policyholders. However, some policies will increase by as much as 50 per cent, according to consumer organisation CHOICE. The group has taken a keen interest in the private health insurance sector and regularly warns about providers’ intended changes. It also has a comparison site for health insurance, but that can be accessed only if you pay to become a subscriber. “People need equitable, affordable access to quality healthcare. Health insurance products that provide very low value for customers, whether they are restricted or excluded cover policies, are undermining this,” according to Sarah Agar, CHOICE head of campaigns and policy. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018

Downsizing: is it your ‘get-out-of-jail’ card? Almost 40 per cent of respondents to our Financial Literacy Survey said they would consider downsizing to free up income for their retirement. Kaye Fallick explores the good, the bad and the ugly about this tactic.

always. Property in very popular seaside resorts can be extremely expensive, so the retirees concerned must take into account stamp duty and legal fees.

he term ‘downsizing’ has become synonymous with retirees cashing in their large homes to fund longer years in retirement. In fact, a surprising 39 per cent of the 5064 YourLifeChoices members who responded to our Retirement Income and Financial Literacy Survey (February 2018) said this was their preferred strategy to supplement or stretch their retirement income. They ranked this strategy ahead of annuities, reverse mortgages and loans.

The rules

But what does the label ‘downsizing’ really mean? Is it as simple as selling high buying low, and pocketing the difference or are there major traps inherent in this popular retirement ploy?

As we are discussing the family home (your principal place of residence, not an investment property), you should be aware of a few key regulations.

In this issue of the Retirement Affordability Index™, we consider the definition of downsizing, review the various rules attached to the strategy and analyse the potential rewards and implications for your retirement income, including for the Age Pension.

Definition Downsizing is defined by the Australian Securities and Investments Commission (ASIC) as “selling the family home (as) one way to free up cash for retirement”. This happens when a retiree sells his or her principal residence and buys a lower-priced (typically smaller) residence in order to free up funds. Many of the current generation of retirees were able to buy homes in inner-city suburbs; homes that are now worth in excess of the median prices for these suburbs – maybe $1 million or more. It makes sense for those in homes that are now larger than their needs to ‘downsize’ to a smaller property. That may be a flat, a townhouse, a retirement village or a home which is located further from the city centre and therefore usually much less expensive. Another common version of downsizing could more properly be termed a tree or seachange. This relates to retirees who opt to live somewhere far less populated, often a coastal town or a country retreat. It may be that the new property can be bought for less than the sale of the existing home, but not 14

The new location might also prove to be a more expensive area, as goods and services involve extra petrol and transport costs, while telecommunications and medical services may be less accessible.

How does the tax office treat downsizing?

First, a family home is exempt from capital gains tax, so there is no likelihood that form of tax will reduce any gains from such a sale.

‘Selling a home in which you have lived for many years and perhaps raised a family, also has emotional implications.’ While you own it, the family home is also exempt from the Age Pension assets test. But as soon as this asset is converted to cash (even if you are holding this cash only until you buy again) then it is viewed to be earning income, and the deemed income will be used to assess your pension eligibility. It is not deemed as an asset for 12 months, but it is certainly deemed to be earning income. So you have effectively swapped an exempt asset for income, which is used to measure any Age Pension entitlements. You may well lose your Age Pension, or have it reduced, while you ‘park’ this money before buying another property. If you do indeed re-purchase at a lower net price (after all costs of sale and purchase have been deducted), you will have a cash balance. This is now

YourLifeChoices Retirement Affordability Index™ March 2018

an asset that must be declared. Again, you may find your pension eligibility is threatened if you exceed $556,500 as a single homeowner, $759,500 as a single non-homeowner, $837,000 as a homeowner couple and $1,040,000 as a non-homeowner couple.

accommodation, perhaps something more modern or lower maintenance. Others like the idea of created communities such as retirement villages or purpose-built communal housing. And the experience for many who have made such a change can be extremely positive.

This can possibly be avoided under new legislation introduced in the 2017-18 Budget by Treasurer Scott Morrison.

Take your time

New legislation On 1 July 2018, the so-called ‘downsizing’ assets test will change. This will allow retirees to make a nonconcessional contribution of up to $300,000 (singles) or $600,000 (couples) into super from the proceeds of selling their primary place of residence, if they have lived there 10 years or more. This contribution applies even if the super balance exceeds the current $1.6 million cap. Income from this super nest egg will be taxed at 15 per cent, rather than at normal tax rates. It is not compulsory to participate. That is just as well because, as YourLifeChoices’ modelled case studies reveal, most Age Pensioners will be worse off in the long run, despite the apparent concessionary treatment. Selling an exempt asset seems to mean that the deemed income and increased asset level is highly likely to severely reduce your Age Pension possibilities. (Consider Ann’s warning and the effects on the Age Pension.)

The rewards Despite the many pitfalls inherent in such a significant property decision, the rewards are worth considering. Many people do reach a stage in their lives when they feel their existing home is simply too big or too expensive to manage. They also may wish to try a new lifestyle in a different area or a different style of

Selling a home in which you have lived for many years and perhaps raised a family, also has emotional implications. As does moving away from a community in which you have felt comfortable and connected. These broader social and emotional considerations can be just as important as the financial. If nearly 40 per cent of retirees are considering using their largest asset to stretch their retirement income, it is a decision that should be taken with the support of objective and qualified financial advice. The full implications of such a move on health, wellbeing, money and family need to be considered. THE NUMBERS According to the Productivity Commission (Housing Decisions of Older Australians, 2015), about 20 per cent of people aged 60 or over have sold their home and bought a less expensive one since turning 50. Another 15 per cent have “strong intentions” of doing so in the future. Social and emotional factors, rather than financial considerations, are the main reasons for downsizing: • Less upkeep 30% • More suitable accommodation 15% • Free up money 14% • Live closer to family 12% YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018

Why you might need financial advice even if you think you don’t Could it be a case of ‘you don’t know what you don’t know’ when it comes to managing your retirement? Financial planner Vitaliy Tsitalovskiy presents the case for the affirmative.

n overwhelming number of YourLifeChoices members surveyed in the Retirement Income and Financial Literacy Survey 2018 said they believed they didn’t need a financial planner. In fact, 86 per cent said they managed their own financial affairs and 63.4 per cent said they understood finances and investments either well or very well. In my experience as a professional financial planner, I’ve found the most common issues facing retirees are that they either leave it too late to get their retirement planning in order or that retirement is forced on them earlier than anticipated due to illness or losing a job. Research commissioned by Australian Super and conducted by Investment Trends in 2017 found that three out of four Australians had concerns relating to retirement adequacy with the highest unmet need being retirement planning and retirement adequacy. The report also noted that the most common reasons Australians don’t seek advice was because they felt they didn’t have enough money to get advice (they thought you needed at least $250,000 to make it worthwhile) or because advisers cost too much.

Advice could be about getting the right answers to some important questions, such as whether you should be working longer or downsizing the family home, whether you are able to buy that new car, go on an overseas trip or help the kids with their home deposit. Crucially, it could be about avoiding making potentially expensive mistakes because sometimes you just don’t know what you don’t know.

‘The most common issues facing retirees are that they either leave it too late to get their retirement planning in order or that retirement is forced on them earlier than anticipated.’ In trying to evaluate whether you need financial advice, you could ask yourself the following: • Am I confident that I have a good working knowledge of investment markets?

As you might expect, I firmly believe that the right type of advice, at the right time, can make a real and significant difference to your financial wellbeing. Just as importantly, it can also give you confidence that you’re on track and have the correct strategies in place.

• Am I confident that I have a good working knowledge of the taxation system and the rules that apply to superannuation and investments?

I need to stress here that advice is not just about investments and investment returns. Getting an extra return on your investment is all well and good, but it pales into insignificance when the correct tax or Centrelink strategy might boost your annual income significantly more. Advice is also about setting realistic and achievable financial goals, getting any government assistance to which you are entitled, protecting your assets and feeling in control of both your finances and your life.

• Do I enjoy reading about money, super, tax and investment markets?

• Am I confident that I have the right strategies to maximise my Centrelink entitlements?

• Do I have the time (or the inclination) to monitor, evaluate and make periodic changes to my portfolio and/or my investment strategy? • Am I confident that I have the right strategies in place to protect my income and assets into retirement and that my money will last long enough?

YourLifeChoices Retirement Affordability Index™ March 2018

If you answered ‘yes’ to the above questions, you may be right in thinking you don’t need an adviser and you can go about your business. But if you thought ‘no’, ‘maybe’ or ‘I’m not sure’, then you may need to consider getting some help. Similarly, if you feel a little ‘lost’ in planning for your financial future or you just don’t want to deal with it, then seeking some professional help could be beneficial.

can help you and how much work will be involved. At this point they should also be talking about any fees that will be involved. This is your chance to ask lots of questions to help gauge if the adviser is the right one for you and your needs. Here are some questions you may want to consider: • What qualifications do they have?

If you’re still not sure, a great place to get some more information is ASIC’s MoneySmart website. The website includes a variety of tips and resources regarding financial advice, including the option to download the ‘Financial advice and you – Where to start’ information booklet.

• What experience do they have: how long have they been an adviser and what types of clients do they usually provide advice to?

Should you decide you need help, where do you start?

• Are they licenced under an Australian Financial Services Licence (AFSL)? If you haven’t already received their Financial Services Guide (FSG), ask for a copy.

The most common first port of call is to ask friends or family for a referral. Other options are to talk to your bank, your superannuation fund or your accountant. Professional associations such as the Financial Planning Association (FPA) can also help put you in touch with a suitably qualified professional adviser. The good news is that most financial planners these days offer a complimentary introductory meeting. This meeting is a terrific opportunity for both you and your prospective adviser to get to know each other. Your prospective adviser should start by asking you about your personal and financial circumstances, what sort of advice or services you’re looking for, your preferences and attitude to risk and so on. This will help the adviser determine how he or she

• What sort of advice can they provide? Some advisers can provide only limited or specialised advice and may not suit your needs.

•A re they a member of any professional associations? • How do they charge for their services? This might include a mixture of initial and ongoing fees. • How do they get paid? Base salary, bonuses and/ or incentives and so on. Good luck with any future decisions. Vitaliy Tsitovskiy works for AustralianSuper, the nation’s largest superannuation fund. He is a degree qualified Associate Financial Planner with more than six years’ experience in funds management and financial planning. His speciality is maximising Centrelink, tax planning and making the most of super for your ideal retirement. This information may be general financial advice, which doesn’t take into account your personal objectives, situation or needs. The views expressed are those of Vitaliy Tsitalovskiy and not AustralianSuper. Authorised Representative No. 1003998. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018

‘I need Superannuation 101’ YourLifeChoices member Lynne Dorney has worked for almost 40 years, attended financial information seminars and tried online super calculators. Yet she still describes financial literacy as a minefield.

am a long-time divorced 61-year-old woman living in Adelaide, who has spent nearly 40 years in the workforce.

My ‘first career’ super has been ‘growing’ at the Consumer Price Index since 2000, so very minimally! My ‘second career’ super is growing at a reasonable rate, but I am not allowed to transfer my earlier super into the higher returning scheme until I permanently retire from the workforce – too late. The end result will be comparatively modest, but enough to make a difference. I will be retiring in five years or may have to resign earlier either for my own health or to care full time for my 86-year-old mother who lives with me. May I humbly state that I am not silly. I have an IQ of 146 and am accomplished in many ways, but when I start to research superannuation my brain glazes over in the same way teenagers look blank when you start lecturing them about tidying their rooms.

‘I’m terrified to make the wrong choice so I make no choice! I am simply frozen with fear, and time is passing.’ I have attended several super information sessions and have always found them to be talking about someone else's situation. I have completed countless ‘Will Your Super Last/Salary Sacrifice’ online calculators where they brilliantly show how if you put $100 in before/after tax, the effect will be X or Y. Good information if I could live on less than my take-home pay, which I cannot! I have already downsized the house to try to reduce the endless upkeep and bills. I do believe I should get financial advice but who do you go to? Even our biggest financial institutions have been shown to include ‘rogues’. Should I really believe that because one group was caught (but not punished, it appears, which speaks volumes), the rest are squeaky clean? I fear if I go to someone, will I find out everything I need to know? Will they 18

disclose the bottom line, the small print? Will I know enough to ask the ‘one last question’ that would have shown the flaws in their argument? I read something recently that said simple advice will cost approximately $700-plus, more complex advice $3000-plus. That will buy me what? Advice? Opinion? I understand no guarantees are possible, but even if the advice is sound and accurate today, will that change tomorrow due to legislation changes, or next year, or any time before or after retirement? Life provides a myriad of “Yes, but not in your situation”, “Yes, but only if you had completed Form 26b before you submitted Form 25a” scenarios with results that pull you in too deep to avoid negative consequences. I want to educate myself to know the right questions, all the right questions, enough to make the best decisions. But I cannot find explanations that really help. Information is either too basic or supposes you already understand. I need Superannuation 101 and then to build on that! This is a minefield of mammoth proportions. Terrified to make the wrong choice, I make none at all. I am simply frozen with fear, and time is passing … YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018

Pension and super rules are complex, but help is available Wouldn’t it be nice if you had an assistant to help you calculate whether you will receive a full, or a part, Age Pension?

ustralian retirement income rules are extremely complicated. Whether or not you are one of the 70 per cent of retirees who will receive the Age Pension depends upon your income and assets. But how the pension combines with super and private savings is difficult to understand. Perhaps it’s no surprise then that, according to our recent survey, around 75 per cent of older Australians think that Age Pension entitlements and the rules around super are complicated. And yet better knowledge of these systems would yield hugely positive financial benefits in retirement. Considering that those who are retiring in their 60s will have 20-30 years of retirement to fund, knowing how to maximise retirement income is critical.

Pension and super rules are complex, so YourLifeChoices designed the RetirePlanner™ to simplify the process of assessing Age Pension eligibility, saving you both time and money by replacing the challenge of navigating all related rules on the Centrelink website, potentially removing the need for a preliminary discussion with a financial adviser.

How does it work? In short, it gives you control over both the process and the information you require to estimate your retirement income and help you decide whether you then need to partner with a planner or accountant for professional financial advice.

How much will you get? The Age Pension Calculator evaluates your assets and income in accordance with your relationship status to assess whether you will receive a full or part Age Pension in retirement. At the end of the process, you will receive a printable worksheet detailing all this information and your estimated entitlements. This information is secure, saveable and able to be updated at any time.

How does your spending compare? Once you’ve entered the necessary information, you will be assigned to one of the six retirement ‘tribes’.

These tribes are categorised by whether you are a couple or are single, will receive private income or live on a pension, and if you own your home or rent. The interactive expenditure table will allow you to compare costs, in a weekly, monthly and annual format based on an accurate assessment of the real costs of living in retirement for your tribe. This will help you to review and keep track of your own household expenditure.

This tool has taken an extremely complex process and made it as simple as possible. I now know how much I will get ~ Henry, South Melbourne.

Above all, the RetirePlanner™ will provide an estimate of how long your money will last in retirement and what type of lifestyle you can expect. It will also enable you to better plan your pre-retirement and show you where you need to focus financially in order to have the best retirement possible. More YourLifeChoices RetirePlanner™ is available for only $19.95, which just may be the best investment you’ve ever made. If not, we provide a money-back guarantee! YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018

Government update Part of YourLifeChoices’ mission is to keep you up to date with retirement income changes and updates. Age Pension From 20 March, 2018, 4.7 million pension and allowance recipients received increases to their payments to help them keep up with rises in living costs. The base rate Age Pension for singles rose $12.20 to $826.20 per fortnight, and by $13.20 to $907.60 per fortnight including the pension supplement ($67.30, a $1 increase) and the energy supplement (static at $14.10). The base rate for each member of a couple rose by $9.20 to $622.80 per fortnight and by $9.90 to $684.10 per fortnight including the supplement (a 70 cent increase) and the energy supplement (static at $10.60).

Income test limits The new income thresholds are: • $1983.20 per fortnight for singles (up ($26.40) • $3036 per couple per fortnight (up $39.60).

Existing exemptions to the residence requirements for Age Pension and DSP will stay the same.

Assets test limits

Downsizing legislation

The new thresholds are: • single homeowner $556,500 (up $4500) • single non-homeowner $759,500 (up $4500) • homeowner couple $837,000 (up $7000) • non-homeowner couple $1,040,000 (up $7000).

Newstart The income test cutoffs for the Newstart allowance for those aged 60 and over are: • $1139.17 for singles (up $12.67) • $963.50 each for couples (up $10.50).

Changes to Age Pension rules From 1 July, to receive an Age Pension or Disability Support Pension, a person will need: • 10 continuous years of Australian residence, including at least five years during their Australian working life, or • 10 continuous years of Australian residence and proof they have not received activity-tested income support for cumulative periods of five years or more, or • 15 years of continuous Australian residence. • Residence during a person’s working life is the number of years he or she has lived permanently in Australia between the age of 16 and Age Pension age. 20

From 1 July, people aged 65 and over will be able to make a non-concessional (post-tax) contribution into their superannuation of up to $300,000 from the proceeds of selling their home. The existing voluntary contribution rules for people aged 65 and older (work test for 65 to 74-year-olds, no contributions for those aged 75 and over) and restrictions on non-concessional contributions for people with balances above $1.6 million will not apply to contributions made under this new special downsizing cap. This measure will apply to a principal place of residence held for a minimum of 10 years. Both members of a couple will be able to take advantage of this measure for the same home.

Deeming rates If you own financial investments and receive the Age Pension, or hope to claim the Age Pension, be aware that deeming rates are set to change on 1 July. The income you earn from your investments is generally not what is counted for the Age Pension income test, rather Centrelink deems your financial investments to earn a certain rate of income on those assets. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ March 2018