Retirement Update January 2017 by YourLifeChoices

ISSUE 13

january 2017

Retirement Update

News from the gurus

How to take control of your retirement in 2017 • You don’t need $1 million in super, but you do need … • If a recession occurs, can you protect your savings? • How does your spending compare to the average retiree? • Brexit is now old news, but what’s ahead in 2017? • Find out what’s in store with Centrelink.

YourLifeChoices Retirement Update January 2017

Busting the $1million super myth We caught up with Scott Pape who, after losing his home, is keen to help people understand you don’t need $1 million for a successful retirement.

irstly, Scott your story is inspiring, but did you ever think that rebuilding your life and home would be too difficult? When the fire came through that day in February 2014, everything was lost – our house was burned to the ground and nothing was retrieved. My wife was incredibly emotional – we had our baby son who wasn’t yet one and we were safe, but her wedding dress, our photos, particularly those of her dad who had died the year before – all gone. We didn't even have a change of nappy for our son, but we were safe.

Only one per cent of the population will have $1 million in super when they retire, so 99 per cent won’t. Such an experience is naturally life changing but has it actually made you view things differently? Not really. We’re taught to believe that the more money you have and the more stuff you’ve accumulated the better. But in reality you just want to have the ability to be safe and secure and look after your family – that’s certainly all I’ve ever wanted. In the book you refer to the Don Bradman Retirement Strategy and this will intrigue many, so why Don Bradman? I use the Don Bradman analogy, ‘Strap your pads on. Grab your bat. It’s time to take a swing at the biggest fear people have’, to simplify the premise of how you can live well in retirement even if you don't have millions in super. There are so many awesome people who are aged 50 or above: teachers, 2

YourLifeChoices Retirement Update January 2017

policemen, factory workers, who might be divorced and don't have a lot of money in super. They think they’re right royally screwed and don't want to see a financial planner as they think they don't have enough money. If you own your own home you can live a very comfortable life with $250,000. The strategy paints a clear and simple picture to explain that everything will be okay for the average person. Only one per cent of the population will have $1 million in super when they retire, so 99 per cent won’t. $1 million is often quoted as the minimum amount needed for retirement – I guess you don't agree? The $1 million figure quoted as being needed in retirement is just bullshit. Most people have a hazy idea of what retirement is. It’s not about making as much money as you can and then just sitting back and doing nothing for the rest of your life. I couldn’t think of anything worse than doing nothing, it’s unhealthy. The people who struggle the most in retirement are those who have worked all their life and have no social contacts. One or two days of work per week is actually quite a reasonable way to live in retirement.

Psychologists report that the magic figure when it comes to income is $70,000, anything over that won't make you any happier. Generally older men in their 60s believe that having one or two million in the bank means they’re sorted. So they think they’ll quit their job and have fun, but the reality is often once they’ve done the big trip, they come back and are more miserable than when they were at work. You quote $250,000 as being enough if you own your own home. How important is it to own your home in retirement? No one will ever say you’ve got too much money in retirement, but a major factor in having enough is owning your own home – if you don’t, then you really don't have the security. If you wake up in your 50s and realise that retirement is upon you and don't own your own home, then funding retirement will be difficult, unless you have access to a large income. So, what do you do if you don’t have a home? There are still things you can do and one of the most important is to get rid of your debt. Basically, you’re not ready to retire if you still have debt. Australia’s household debt is one of the highest in the world. People have a lot of comfort in owning their own home and there’s often an emotional reason for holding on to it. If you have your own home but are in debt then you might want to think about downsizing and clearing as much of what you owe as you can. When trying to get your finances in order, don’t do 100 things, do a few and do them well. Financial planners get a bad rap, so do people need to look past the headlines? There’s a lot of doom and gloom newsletters that are just there to scare people with their headlines – ‘if you don't have $1 million in super then you’ve got no chance of a successful retirement’– that kind of thing. This is just designed to agitate, to get you to read their newsletter or, in many instances pay for a subscription so you can find out how to ‘fix’ your situation. People typically don't want to see a financial planner because they think they’re too expensive or they don't trust them, especially bank financial planners. There are options if you don't want to see a financial planner. Centrelink’s Financial Information Services officers (FISO) are the real unsung heroes of the financial world and more people should use them. FISOs are truly independent and can offer help with aged care, Age Pension and offer access to free resources to help you manage your money.

Photo: Courtesy isamu sawa

When it comes to super, it’s worth hopping onto the Moneysmart website and using its calculator to work out the best option for you. The difference between being charged one per cent and 0.02 per cent in fees is vast. Too many people are also being sold SMSFs but the reality is that they’re difficult to manage and really are a pain in the arse. Industry super funds are a no brainer really – they offer the lowest fees, often have higher returns and you can also buy shares if you choose. YourLifeChoices Retirement Update January 2017

What tips would you give to someone planning their retirement? 1. Reframe your understanding of what retirement will be – consider transitioning to retirement – many of the happiest retirees all work in some shape or form. 2. Prepare for retirement by keeping yourself really busy and active. 3. When it comes to the financial planning and services industry, no one cares about your money more than you do. Go and see some of those offering free information before you sign up – teach yourself what you need to know – save yourself money.

person to read it and pass it on to their parents, children, single parents, those who really need help to understand the value of taking control of their finances. I want it to give people hope and the understanding they’re not the only ones struggling to get to grips with their financial future.

Is there one learning from your experience that’s surprised you? This is the reason I decided to write the book. It’s as much about making you think about the important things in life as it is about planning your finances. Losing my house taught me money doesn’t make you happier and that the greatest shortcut to happiness is having enough set aside for emergencies. I wrote the book like a father talking to his son at the bar, telling him ‘here’s what you have to do’. What I really want with the book is for it to be accessible to everyone in the family – for one 4

YourLifeChoices Retirement Update January 2017

Scott Pape has been voted ‘Australia’s most trusted finance expert’ and his book, The Barefoot Investor: The only money guide you’ll ever need, is now on sale. RRP: $29.94, with 10 per cent of the royalties going to not-for-profit counselling service, Financial Counselling Australia.

Recession proofing your retirement There’s much talk of recession in the media so Noel Whittaker looks at whether you need to be concerned and what action to take to protect your retirement savings.

bout three years ago, in an effort to simplify some of the major issues for retirees, I wrote my 20 Commandments of Wealth for Retirees. Because they are timeless, they are as true now as they will be in 100 years. Number one is: Ignore the prophets of doom – they are always with us and usually wrong. Number 20 is: Finally – keep in mind that your potential worst enemies can be the media, which focuses on the negative, and well-meaning acquaintances who may give you information that may be half right. Right now the media is focusing on the fact that there has been negative economic news for the last quarter, and a further downturn in the next quarter will mean we are technically in a recession. The good news is that most economists believe there will be positive growth in the next quarter and that a recession will be avoided. While the word ‘recession’ may make for scary headlines, the fact is that retirees are among the least likely to be affected. Certainly a recession may cause greater unemployment, but the upside of that is that building prices may drop and renovations could become less expensive. Although a recession is most unlikely to affect the amount of your Age Pension – the pension changes that took effect on the 1st of the month are a wakeup call that pensioners should be diligent to ensure that their money works as hard for them as they themselves did during their working life. Number eight is: Don’t have all your eggs in the one basket – diversify across the major asset classes and certainly have some international exposure. For starters, you should keep at least three years of planned expenditure in cash where it will be immune from any downturns in the market. Next, at least a third of your portfolio should be in blue-chip Australian shares because even if the market falls, which it well may, the dividends will keep on coming. And remember, a bonus for holders of Australian shares is that most dividends are franked. This means that for most retirees the dividends are not

just tax-free, they carry extra cash in the form of refund of imputation credits. This is a time when good advice is essential. I appreciate that many retirees are nervous of shares, but the great thing about shares is that you can buy them in small parcels, and sell them in whole or part within five days. I know there have been duds, such as ABC Learning and Dick Smith, but you can protect yourself by simply buying an index fund. This is a fund that can never go broke, and which is currently paying about 4.5 per cent mostly franked. Just keep in mind that you should have at least a five-year timeframe when investing in shares because history tells us to expect four negative years and six positive years every decade. It also tells us that the index has averaged eight per cent each year for the last 20 years. Let me finish by reminding you that one of the most important and neglected jobs for our retirees is getting their estate planning in order. This means having a current valid will, arranging an enduring power of attorney and completing an Advance Health Directive, if appropriate. Wishing you all a healthy and prosperous New Year! Noel Whittaker is the author of 20 Commandments of Wealth for Retirees and numerous books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Noelwhittaker.com.au

YourLifeChoices Retirement Update January 2017

Your retirement living costs

September quarter costs In December, the Association of Super Funds of Australia (ASFA) released the ASFA Retirement Standard.

ASFA has kindly allowed YourLifeChoices to share this information.

Weekly expenditure for retirees aged 65â&#x20AC;&#x201C;85

No change

Increased

Decreased

Comfortable couple

Modest couple

Comfortable single female

Modest single female

Building and contents insurance Rates Home improvements Repairs and maintenance Total housing

32.71 38.41 10.90 19.08 101.10

25.89 32.71 0.00 13.63 72.23

27.26 32.71 10.90 16.35 87.21

25.99 32.84 0.00 16.42 75.25

Electricity and gas Total energy

59.16 59.16

57.09 57.09

43.62 43.62

42.98 42.98

Food â&#x20AC;&#x201C; groceries and other fresh food Total food

201.57 201.57

162.38 162.38

111.98 111.98

78.39 78.39

Bundle of home phone, broadband, mobile Total communications

28.97 29.97

14.50 14.50

22.76 22.76

8.28 8.28

Household cleaning and other supplies Cosmetic and personal care items Barber or hairdresser Music and CDs Newspapers and magazines Computer, printer, software Household appliances Pest control, alarm service Total household goods and services

26.42 3.15 21.14 2.21 8.47 4.33 12.13 12.98 90.83

15.85 3.03 9.11 0.00 1.97 4.33 3.08 0.00 37.37

19.02 7.08 15.19 0.33 8.26 4.33 10.34 12.98 77.53

10.57 2.03 5.08 0.00 2.47 4.33 3.08 0.00 27.56

Clothing Total clothing and footwear

57.49 57.49

28.74 28.74

38.32 38.32

17.71 17.71

Car transport and running costs Public transport Total transport

132.68 5.14 137.82

88.19 5.14 93.33

132.68 2.57 135.25

88.19 2.57 90.76

Health insurance Chemist Co-payment and out of pocket Total health services

85.60 25.17 44.16 154.92

68.64 3.43 13.31 85.39

43.55 13.88 30.35 87.78

34.32 1.93 7.99 44.24

Membership clubs TV, DVD, digital camera Alcohol consumed in home (or equivalent spent) Lunches and dinners out Cinema, plays, sport and day trips Domestic vacations Overseas vacations Sundry items Total leisure

9.80 1.81 40.91 81.81 13.71 78.38 54.85 30.25 311.52

1.96 0.91 15.34 25.46 19.10 37.23 0.00 11.75 111.76

4.92 1.81 25.57 61.13 6.85 66.62 37.23 23.20 227.32

0.98 0.91 10.23 30.57 5.88 18.61 0.00 7.83 75.01

Gifts and/or alcohol or tobacco

0.00

Total weekly expenditure Total annual expenditure

$1,143.38 $59,619

$662.79 $34,560

$831.79 $43,372

$460.19 $23,996

Expenditure items

YourLifeChoices Retirement Update January 2017

YOUR RETIREMENT BUDGET

How does your spending compare? Expenditure items

Weekly

Monthly

Annual

Building and contents insurance Rates Home improvements Repairs and maintenance Total housing Electricity and gas Total energy Food â&#x20AC;&#x201C; groceries and other fresh food Total food Bundle of home phone, broadband, mobile Total communications Household cleaning and other supplies Cosmetic and personal care items Barber or hairdresser Music and CDs Newspapers and magazines Computer, printer, software Household appliances Pest control, alarm service Total household goods and services Clothing Total clothing and footwear Car transport and running costs Public transport Total transport Health insurance Chemist Co-payment and out of pocket Total health services Membership clubs TV, DVD, digital camera Alcohol consumed in home (or equivalent spent) Lunches and dinners out Cinema, plays, sport and day trips Domestic vacations Overseas vacations Sundry items Total leisure Gifts and/or alcohol or tobacco Total expenditure YourLifeChoices Retirement Update January 2017

Will 2017 be a bumpy year for retirement investments? What a crazy year 2016 has been. First Brexit, then Trump: what next you might ask? In this apparent age of popular revolt, who knows?

ho would have thought the Brits would vote to leave the EU? No one. Not even them. When reality hit, it felt like a bad hangover. Anxiety caused the value of the pound sterling to fall off a cliff, while share markets around the world took a big hit. Thankfully, it was all short term – cooler heads prevailed and before long, markets regained composure. Up until the next big shock. You guessed it... Trump’s victory. I don’t think even Trump expected he would win. However, this time things were different. I thought there would be blood on Wall Street, but there wasn’t. The Dow Jones Index was up 257 points at 18,590 – whilst our market fell 101 points and global markets followed suit, Wall Street welcomed Trump with a bang. What started off as overnight panic evaporated, giving way to a euphoric cheer. That cheer can still be heard with many calling it the ‘Trump rally’. So, what has happened since? Following Brexit, markets have adjusted to change and uncertainty. The rally that ensued is due in part to Trump's victory speech, which raised hopes that he will focus on policies that can help the economy and not follow through on some of his silly campaign promises. It’s also a sign that markets are becoming immune to these types of shocks. Investors appear to have learned their lesson from Brexit – “Don’t trust the polls and be ready for anything”. If I’ve learnt anything from 2016 it would be: 1. Don’t trust the polls or bookies: they’ve got no idea and are completely unreliable. 2. Markets have become immune to shock political outcomes and are now better at digesting news without the knee-jerk reactions you would normally expect to see. 3. It is all short-term stuff. Don’t panic and sell. All the panic and brouhaha with Brexit vanished very quickly and the markets moved on to the next big thing. 8

YourLifeChoices Retirement Update January 2017

Whilst I don’t have a crystal ball, I can give you some idea of where I think markets are headed in 2017 and the major themes that may be at play. Whatever the election of Trump has meant, it has brought much talk of rising inflation. Growth will also expand and will bring about a change in investor sentiment. In other words, heralding the complete opposite of pre-election predictions. As a result, we’re already seeing rising bond yields, a rotation out of bond proxy stocks into banks, cyclicals, energy and resources. We may see a US Federal Reserve rate rise, which in turn will depreciate the Australian dollar. The RBA cutting cycle looks to be over, but who knows?

For those who have accumulated wealth over many years… it is easy to panic about the threat of loss of such wealth. The market won’t have any shortage of shock news to choose from this year, either. Rising populism and protectionism will continue with Germany and the Netherlands hitting the polls. Britain’s triggering of Article 50 and the commencement of its slow exit from the EU lingers in the background. Monetary policy has hit its upper limit. After years of loose expansionary monetary policy, central banks have no more bullets to fire. Japan, too, may be forced to pull back on bond buying. This all leads me to claim 2017 as the year of the fiscal rooster. The increasing ineffectiveness of monetary policy will encourage many developed nations to spend big on infrastructure, which should help commodity prices to remain stable over the coming year.

With regard to market predictions, I’m not an economic forecaster but I did read somewhere that Credit Suisse are tipping the local market to end 2017 at 6000 (up 11 per cent on current levels). I’ll go with that. Becoming immersed in media headlines can cause knee-jerk reactions and we don’t need that. There will be moments when you are struck by fear and whatever the cause, it is important to find a way to remove emotion from financial decision-making. Kerstin Stokoe, renowned in finance and psychology, wrote an article ‘Have you been trumped by fear?’ about dealing with emotion and finance. She says for those who have accumulated wealth over many years, and may have commenced or are planning for retirement, it is easy to panic about the threat of loss of such wealth. Some useful strategies to manage our fears and the Trump effect may include the following:

• ensure that your financial decisions support a long-term view rather than being sudden reactions based on fear • review your portfolio in regards to your financial strategy • review your shares without the emotion • speak to your financial adviser. All in all though, keep on doing what you’re doing – business as usual. Nothing has really changed. Brexit and Trump were merely speed humps in the road. The market had a knee-jerk reaction and reversed it entirely in the space of one night. It’s all very short-term stuff and is purely sentiment driven. What matters is that you stick to your goals and don’t lose sleep overnight worrying about your portfolio. If a stock is on the nose, sell it and move on.

• stay calm and remember to breathe (even if you have to wipe away tears first) • reflect on history and recall other major events that have rocked the world as we know it, both recently and many years ago (such as The Depression, 9/11, and the Global Financial Crisis (GFC)) and the effects they have had on markets over the longer term

Russell Lees is a Partner and Senior Adviser at Sornem Private Wealth. He specialises in managing and maintaining strong relationships with high net wealth private clients. Russell is also a Director of the AIA, a member on the Melbourne Committee and runs the Blackburn Local Area Discussion Group.

YourLifeChoices Retirement Update January 2017

Stockmarket 2017: the power of post-it notes The average investor thinks that investment comes down to anticipating the unexpected or predicting the future, but Marcus Padley believes it’s simpler than that.

very year there are a handful of ‘unpredictable’ events that sweep away all the financial theory, research, complications and endless blah blah blah with which we are bombarded. Things that, had we known, would have made us money; things that could have been communicated to us through a few simple words at the beginning of the year. I like to call them post-it notes; one-line directives that you wish someone had stuck on your screen at the start of the year. Things that would have simplified everything. Twelve months ago, for instance, the most valuable post-it note might have said, ‘Resources will recover’. That’s all you really needed to know in 2016 because the sector went up 49 per cent. As they say in the stock market, if you have one good idea a year, it’s a good year. But perhaps the most important post-it note for a lot of risk-intolerant retirees was the one that said 9–10 per cent yields on the banks are an opportunity not a disaster. Not so difficult. Another simple one would have been ‘The market’s going up’. It was up 10 per cent. So what are the post-it notes for 2017? The good news is that you don’t have to have a crystal ball to

YourLifeChoices Retirement Update January 2017

make money in any investment market. You don’t need to predict the future to make money. All you have to do is wait for something to happen and react to it when it does. In other words, you run with the themes until they change. Resources, energy stocks and banks are currently leading the market. Expect that to continue until it doesn’t because the art of the stock market is not about fortune-telling at all, it’s about being vigilant enough to spot the changes and react. Spot the uptrend and the start of the downtrend, don’t predict it. It’s really not that difficult and it’s a lot easier than fortune-telling. I went to see a fortune-teller in India once. At the time, I had a very short haircut. His first prediction was, “I see you in a uniform”. That’s the key to fortune-telling; notice what’s happening right in front of you, not what’s in the future. In this case the fortune-teller was wrong. I just had a short haircut. But the odds were on his side and I admire his effort and vigilance, because that’s playing the game. Marcus Padley is a stockbroker and the author of stock market newsletter, Marcus Today. For a free trial go to www.marcustoday.com.au

Government and Centrelink news in 2017 With major legislative changes scheduled for 2017, keeping up-to-date with Government and Centrelink news is vital. Increasing the Age Pension age Itâ&#x20AC;&#x2122;s been known for quite some time that the eligibility age for the Age Pension would start to increase from 1 July 2017, until it reaches 67 by 2023. A breakdown of the increase is as follows: Date

Eligibility age

1 July 2017

65.5 years

1 July 2019

66 years

1 July 2021

66.5 years

1 July 2023

67 years

For more information, visit HumanServices.gov.au

Pension Supplement overseas As part of the Mid-Year Economic and Fiscal Outlook, the Government announced plans to cease the Pension Supplement for those on the Age and Disability Support Pension who travel or live overseas for more than six weeks. If legislated, this rule change will take effect from 1 July 2017. For more information, visit YourLifeChoices.com.au

Age Pension payments overseas Originally planned to commence from 1 January 2017, the tightening of proportionality requirements for Age Pensions paid overseas is still to be passed as legislation. This legislation, when and if passed, will result in a reduction, from 26 weeks to six weeks, of the length of time a person can be overseas before the work life residency rule is applied to their Age Pension payment. For more information, visit HumanServices.gov.au

Asset threshold changes The new asset thresholds took effect from 1 January 2017 and for some, will result in the loss of their Age Pension. If this applies to you, then you will be issued with a Commonwealth Seniors Health Card, which will grant you concessions on prescription medication, health care and other discounts

offered by state and local governments. If you have lost your Age Pension or had your Age Pension reduced under this change, and your circumstances subsequently change, then you will need to advise Centrelink of any update in assets before your Age Pension can be reinstated. For more information, visit HumanServices.gov.au

Increased choice in home care From 27 February 2017, older Australians will have more say in the care they receive at home. Those in receipt of a Home Care Package will be able to choose a provider based on their individual needs and circumstances. If the individual chooses to move provider or service from this date, any unspent Home Care amount will be allocated to their new service or is repaid to both the individual and the Commonwealth. Find out more at Health.agedcare.gov.au

Inclusion of rental income in aged care support From 1 January 2017, all new entrants to an aged care facility will have any income from the rental of their former home included in their income support assessment. The income will be assessed under the income test and, after two years, the former home will be assessed as an asset, unless it is occupied by a partner. For more information, visit HumanServices.gov.au YourLifeChoices Retirement Update January 2017

Five ways to make retirement more affordable

How you can afford to live in retirement on a reduced income can be daunting, but with a little know-how, cutting costs is much easier.

hile some lifestyle compromises must be made, living frugally in retirement doesn’t necessarily mean reducing your quality of life. To avoid spending more than you need to, consider these five tips to ensure that you only pay for the things that are really important.

Manage bank fees Keeping your finances in order is the best way to ensure you enter retirement on a strong footing. Now that you are earning less, you’re hopefully going to be spending less, so you should review the types of credit cards and bank accounts you need. For example, do you still need your Qantas frequent flyer credit card if you won’t be spending regularly enough to accrue points? Perhaps consider going for a fee-free card. The same goes for your bank accounts. Why pay unnecessary account fees? You can find out which accounts don’t charge a monthly fee on CHOICE’s website.

Assess your household costs

When looking for simple ways to save money, reducing your household utility costs is a great start. You can save on water and electricity costs by shopping around for a better deal with each energy supplier. To compare energy offers in your area, visit the Australian Government's Energy Made Easy website. Taking shorter showers, turning appliances off at the switch and closing gaps around windows and doors to trap in the heat are also good habits to adopt.

Make the most of your Seniors Card If you’re entitled to a Seniors Card, you may be eligible for discounts on energy and water bills, as well as reduced council rates, stamp duty concessions, cheaper registration, free ambulance and discount prescriptions through the Pharmaceutical Benefits Scheme. You can register for discounts on your utilities by phoning your energy and water companies and informing them that you’re eligible.

Check in with Centrelink’s Financial Information Service Because you don’t know what you don’t know, a Centrelink Financial Information Services officer (FISO)

YourLifeChoices Retirement Update January 2017

can help you understand your financial situation properly and assist you in making informed decisions about investments and financial issues, now and for the future. This is a free and confidential service for all Australians. You can make a booking through the Department of Human Services website.

Review your insurance policies With premiums rising all the time, it pays to review your insurance policies and get the best deals – especially before entering retirement. Whether it’s your health, life, home contents or car insurance, different providers will offer different options and it’s your job to investigate which one will be most costeffective for you. A phone call to your insurance company to advise them that you’re looking to switch to a company offering a better deal can sometimes result in the offer of a lower premium. If you’re unsure about how to begin reviewing your policies, this insurance guide can help. When it comes to preparing for retirement, these steps may seem small but they can end up saving you a lot of money, making life in retirement much more affordable. Disclaimer: This material contains general information which 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 advice you should consider its appropriateness having regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that impact your financial and legal circumstances. Date prepared is January 2017.