Life Begins At ... Guide to Financial Independence

It is one thing to be clever and another to be wise George R.R. Martin In life, it’s not what you get but what you become Albert Einstein Life begins at ...

It’s never too early to start planning for . Now is the time to start thinking about wealth preservation. You’ve worked hard, so it’s time to reap the rewards.

Superannuation work test to be eligible to make this age without having to retire super contributions). Making or leave your job is so that you Superannuation is much more of contributions this way is tax have more flexibility to develop a focus with this age group than effective for the individual and is strategies in your ‘transition’ to any other – for obvious reasons. an important part of any retirement retirement. The benefit of this These are the vital years where strategy. strategy is that you don’t actually must be well have to reduce your work hours. Talk to your adviser about underway to ensure a comfortable You can still work full time. lifestyle after you stop work. strategies for maximising contributions into super, and what This TTR is popular Contributing to superannuation is the most appropriate way forward for those over age 60 because more relevant for the over-50s as is for you. pension income from the TTR is cash is generally more accessible tax free after age 60. This provides compared with the other age Transition to an opportunity for these individuals groups. is largely under Retirement to manage their income tax and control or gone, the children have their superannuation savings (hopefully) moved out and in most An extremely popular strategy concurrently in a tax effective cases are higher relative for people over age 60 is the manner. One particular strategy to experience. ‘Transition to Retirement’ strategy. includes sacrificing additional Even if you are still working you Additional contributions can be into super, thereby can access your superannuation made via sacrifice for reducing income tax, and then via a non-commutable pension employees, or tax deductible supplementing the reduced – known as the transition to contributions for individuals with TTR pension income. retirement (TTR) pension. under age 75 with assessable Talk to your if you income (if over age 65 the The reason for allowing you access would like to know more about this individual must meet the 40hr to your superannuation from strategy.

3 Self Managed Super If you have your own SMSF you market sectors. Review whether have more flexibility with your the you have are Funds planning than those the best ones to withstand The popularity of Self Managed who don’t. This provides you with downturns in market conditions. Super Funds (SMSFs) is evident more opportunities to manage §§ Surveys show that SMSF in statistics released by the your funds through periods of Trustees stick to their long term Australian Tax Office. More uncertainty. investment strategy during volatile markets. Australians are establishing SMSFs Some simple investment tips for §§ Market movements are very each month and the rate just your SMSF: keeps growing. This is largely due random and so performance is to the control you have over your §§ Review your investment portfolio random. Canny investors will own superannuation. As Trustees allocation to make sure it take advantage of this. Have the as well as members of your own remains in line with the fund’s courage to pick up bargains in super, you get to call the shots – investment strategy. If necessary the down years and know when as long as it is within the law rebalance your portfolio – this to take profits in the good years. will control risk and position for of course. For more information on self recovery. managed super funds, ask your ATO statistics on SMSFs show that §§ Make sure the you adviser for a copy of our SMSF SMSFs are more popular for the hold in your SMSF portfolio brochure, ‘An Essential Guide to over 50’s age bracket, which is not are quality assets, diversified Taking Control of your Super’. surprising. across asset classes and

These are the vital years where retirement planning must be well underway to ensure a comfortable lifestyle after you stop work.

4 | Life Begins At ... Guide to Financial Independence v1.3 02/17 Retirement Income The three main sources of income Superannuation balances required to achieve a comfortable The major issues facing retirees in retirement are: retirement can be summarised as: §§ superannuation – in the form of §§ longevity – how long will I live Category Savings at retirement a pension income stream and/or for, and will my capital last? lump sum withdrawals Comfortable lifestyle for a couple $640,000 §§ – will my money be §§ non-superannuation assets able to retain its spending Comfortable lifestyle for a single person $545,000 – in the form of returns from power?, and Source: ASFA Retirement Standard, Sept Qtr 2016 shares, property, cash and fixed §§ income – from where will my income be sourced? All figures in today’s dollars using 2.75% AWE as a deflator and an assumed §§ Centrelink – that is, age investment earning rate of 6 per cent. They are based on the means test for the Longevity pension benefits. Age Pension in effect from 1 January 2017. Our life expectancies are The capital required to provide increasing over time. This trend is the income from these sources rapidly rising due to the amazing (excluding Centrelink) will vary However, most people’s objective amount of medical breakthroughs depending on how much you is to be self-funded, or largely we are experiencing, as well as need in retirement, your age at self-funded, in retirement. The our increased knowledge on better retirement and how long you think more you have saved in your living through diet and exercise. you will need the funds to last. superannuation and non- The problem is that as we live for The March 2017 ASFA Retirement superannuation investments a longer period of time we also Standard report shows that a means a more comfortable need to support ourselves for couple would need to spend standard of living in retirement – longer in retirement. There are no at least $59,971 a year to live without relying on the Government. guarantees on how long our assets comfortably*, and a modest** *A more comfortable lifestyle in retirement will last. retirement for couples would cost – enabling an older, healthy retiree to be involved in a broad range of leisure and Inflation at least $34,855 a year. recreational activities and to have a good The second most important standard of living through the purchase of A single person would need to such things as household goods, private issue is whether our capital can spend at least $43,665 a year to health insurance, a reasonable car, good keep pace with inflation. High- live comfortably or $24,250 to live clothes, a range of electronic equipment, and domestic and occasionally international inflationary periods can erode modestly. holiday travel. (Source: ASFA Retirement capital over time if we have not Standard). How long you continue to derive allowed for sufficient exposure income from your saved capital will **A modest lifestyle in retirement – a better to growth assets. Having a large lifestyle than that provided by the Age depend on how much you spend allocation to cash can actually Pension, but limited to fairly basic activities. each year – and how much you (Source: ASFA Retirement Standard). be detrimental to an investment actually ‘spend’ could be different portfolio over the longer term. to what you had ‘planned’. To keep pace with cost of living Of course, Centrelink is there to increases over time, therefore, it is supplement your other income if imperative an investment portfolio your financial position qualifies has some exposure to growth- you for a full or part age pension type assets (such as Australian payment. However, there should and international shares, and be an attempt in your retirement property). Just how much exposure planning to minimise dependency will depend on each individual’s on Centrelink benefits. This aversion to risk. mitigates any regulatory risk in relation to potential Government policy changes in the future.

5 Retirement Portfolio §§ Maintain diversification of §§ Consider some capital protection income assets with some strategies if required. Strategies potential for growth. There §§ Take advantage of shares that How can you maximise your are a number of quality fixed offer franking . The income and capital position? interest investments available pension phase in super is a Consider the following tips. that pay reasonable income with tax free environment, which some equity characteristics but means franking credits are fully For Defensive Assets: without the same degree of risk. refunded back into the account. §§ Try to hold at least two to three §§ Try to draw down from defensive The long term compounding years of income payments in assets if extra funds are needed. benefits of this to your account cash, preferably in a higher Your aim is to preserve capital balance can be significant. yielding account. This should so if you need additional §§ Review your portfolio and provide ample time to reflect funds to cover larger lump rebalance regularly as required on current markets and to sum draw from your to ensure your desired asset ensure you do not need to defensive assets where possible. allocation is maintained. This draw down on capital to fund is the best way to ensure your For Growth Assets: superannuation pension portfolio continues to meet your payments. It avoids having to §§ Maintain your growth assets objectives for risk and return. sell down assets in low market for at least five to seven years periods. without accessing them. Your §§ Within the 3 year cash objective here is to achieve allocation, consider having two reasonable growth to manage years of payments in short term longevity issues. money market investments. §§ Maintain a good spread of These pay slightly higher rates growth assets. Diversification than normal ‘at call’ cash across various sectors is the accounts. key to minimising capital losses during volatile periods.

6 | Life Begins At ... Guide to Financial Independence v1.3 02/17 Having a diversified portfolio is the essence of asset allocation. One of the most important decisions you will make is how much to allocate between the asset classes as your choice will fundamentally determine the long-term investment returns and fluctuations (volatility) of your portfolio.

Investing more, and have experienced the determine this. You must answer Understanding the risk/return ups and downs that come with these questions honestly. That is, trade-off for the various asset Asset Allocation share markets. They are therefore you cannot base your answers on sectors is very important. That is, Markets do recover following a more inclined to take a little more what you ‘think’ you might be, but the greater the returns, the greater downturn – it’s just a matter of risk with their investment dollars. rather on how you really ‘feel’. It the risk you take; and vice versa. time. However, time may not be is common to see investors who Everyone wants nirvana – where Borrowing to invest is not without a luxury for those who are close previously believed themselves risk is low and returns are high risk and when markets fall it is to retirement and have targeted to be aggressive investors and – but this is near impossible to very important you keep in touch a specific capital goal for when able to handle risk during a bull achieve. with your adviser so that you they stop work. This is where the market, suddenly become far more can both manage your as Putting risk/return trade-off asset allocation – that is, how your conservative when faced with effectively as possible. into more perspective, you can investment portfolio is allocated market adversity. see from the table below how across the various asset sectors – Risk profiles can change Also remember that your risk defensive assets such as cash and will play a big role in the long term over time profile may change over time fixed interest pay relatively good performance of your fund. Getting your investment risk profile particularly as you near retirement. income, but have no growth and Successful asset allocation means right is very important. When you Your investment outlook could therefore low risk. Shares on the achieving your objectives with the meet with your adviser, he or she change from growth to more other hand have high potential least possible risk. To do this you will generally discuss your attitude income-type investments. This is for capital growth and so the risk need to understand the behaviour towards investing and how much why it is important to re-assess factor is also higher. of asset classes and products. risk you think you can tolerate. your position on a regular basis. Establishing an asset allocation A risk profile questionnaire helps that is consistent with your goals and risk tolerance should be your top priority. Behaviour of Asset Classes Borrowing to Invest Asset Class Income Capital Growth Tax Effectiveness Risk Borrowing to invest, as with the ‘Thirties to Forties’ investors, is a Defensive Assets popular strategy for this age group. Cash Low/Med None None Low However, we would point out that due to the long-term nature and Australian Fixed Interest High None None Med inherent risks of borrowing, it may International Fixed Interest High None None Med not be an appropriate strategy if you are already in retirement. Growth Assets Most investors in this age group Australian Shares Med High High High understand market conditions International Shares Low High Low High Property Low/Med Low Med High

Source: Morgans

7 Debt Management At this stage of your life, most With the changes to then used to retire the debt of your personal debt – your superannuation rules, many completely. This can be a very mortgage, personal loans, people are reconsidering the effective method for some. cards – would be under control traditional strategy of using However, before you consider or even eliminated. available cash to repay their this strategy it is very important debt as soon as possible. For those who still have a you seek advice from your Instead, they are converting the mortgage or other personal financial adviser, who will work debt to interest-only and using debt, now is the time to pay it out whether this is the best the freed up cash to contribute out. Or at least manage your plan for your circumstances. In to their superannuation account. debt within your retirement some instances it may still be At retirement, a lump sum savings strategy. better to stick with tradition and benefit is withdrawn – tax concentrate on repaying your free if over age 60 – which is debt sooner.

Wealth Protection What do you need? Life cover can supplement In these later years you tend to People are living longer these superannuation benefits or other find are paid off. There is days and medical technology is income for a non-working spouse also a focus on retirement, health advancing at a rapid pace. Trauma in the event of a death of the and having adequate income. and TPD cover remains a priority primary income earner. for this reason as the lump sum If something happened Circumstances change with your benefit can help if you have been unexpectedly, the main concern stages of life so you should talk to diagnosed with a critical illness. would be day to day living an adviser about what product and This lump sum could be used to expenses and medical costs features suit your needs. make alterations to your residence during recovery. Making major or car, and to cover medical or changes after illness, such as remedial costs. home modifications, may also be a financial outlay that would need to be covered.

8 | Life Begins At ... Guide to Financial Independence v1.3 02/17

“Can I retire now with what I have? Do I need to continue working?”. This is quite a pertinent question for people over age 55 and receiving a redundancy.

Redundancies period is very important. Due to Part of any employer redundancy the fact we are all living longer, you receive will generally also Receiving a redundancy package this time period could represent include payments for unused for someone over 50 can be quite another 20 to 30 years or more. annual leave and long service significant and in many instances You need to take this into account leave (if applicable). These stressful. The individual’s first before making any decisions about amounts do not form part of your thought is usually ‘will I be able to retirement. termination payment find another job due to my age?’. It and also cannot be rolled into The final consideration for most is arguably harder for the over-50s superannuation. They must be people will be how the redundancy to find employment compared to taken as a cash payment after tax is paid, and what tax will be due. the other generations. has been deducted. Special tax Employees can no longer roll rates apply if you are receiving Another consideration for this their redundancy payment into a genuine redundancy. You may, age group is ‘can I retire now superannuation. All payments are however, contribute the net with what I have? Do I need to paid net of tax. continue working?’. This is quite amount into superannuation as a a pertinent question for people Individuals over 55 receiving a non-concessional contribution – over age 55 and receiving a redundancy payment receive better watching contribution limits. If you redundancy. However, ensuring tax concessions than those under are over age 65, remember you that if you do stop work completely age 55, so speak to your adviser will need to meet the work test you have sufficient superannuation about how you can maximise your before you can contribute to super. and other savings in place to tax savings. last throughout your retirement

10 | Life Begins At ... Guide to Financial Independence v1.3 02/17 Centrelink Issues Estate Planning Centrelink benefits are available for Estate planning is an area that can Where to from here? eligible seniors who have retired be easily neglected. Individuals §§ Maximise your superannuation contributions or are about to retire. Eligibility is often overlook the importance (talk to your adviser about the strategies most appropriate based on two tests – the Incomes of having an up to date Will and for you) Test and the Assets Test. Your Powers of Attorney. §§ If you don’t already have one, consider how a self financial position (combined if a Estate planning focuses on wealth managed super fund may help you take control of your couple) is taken into account for preservation and wealth transfer superannuation these two tests, and eligibility for so regardless of whether times are §§ Think about how you can take advantage of Transition benefit payments is determined by good or bad, your objective should to Retirement strategies the outcome of these tests. still be to distribute your wealth to §§ Review your investment strategies and consider how your Health care cards may also be your nominated beneficiaries in the risk profile has changed available following retirement. most effective way. §§ Review whether your portfolio is set for retirement The type of card you receive will §§ Talk to your adviser about reducing or eliminating debt Estate planning doesn’t end with depend on your age, and whether §§ Implement or review your wealth protection plan your Will and Powers of Attorney. you are self-funded or in receipt of §§ Review your estate plan You should also be thinking about: some Centrelink benefits. §§ How Testamentary Trusts Aged Care offer improved protection of the estate. Roughly four in every ten older §§ Superannuation does not people (aged 70 and over) are automatically come under accessing some aged care the scope of your Will unless services. This includes receiving specifically nominating your care in their own home. Estate as the beneficiary. Entering an aged care facility, or For this reason you need to assisting a family member to do establish additional nominations so, can be very emotional for all for your superannuation. concerned. §§ succession planning There are a number of publications – if you have a business and websites to help you sort you should have a business through the noise, particularly succession plan in place. when searching for an appropriate For more information contact your aged care facility. As this area is financial adviser. very complex, you should seek further guidance from an adviser who specialises in aged care. Also view www.myagedcare.gov.au

11 Planner January February March April May Income Salary/Wage Bonuses Investment Income Interest TOTAL INCOME Personal Expenses Credit Cards Mobile Phones Personal Loans Gym/Club Memberships Clothes and Shoes Medical Food Transport Housing Expenses Rent/Board/Mortgage Rates/Body Corporate Telephone/Internet House/Contents Insurance Insurance and Wealth Protection Income Protection Premiums Life Insurance Premiums Trauma/TPD Premiums Private Health Insurance Education Child Care Fees School Fees Extra-curricular Fees Coaching/Tutoring Books HECS/HELP Car Expenses Repayments Insurance Registration Petrol/Oil Maintenance/Tyres Motoring Association Fees Driver’s Licence Parking Other Restaurants Subscriptions Magazines/CDs/Books Gifts Donations Fitness Personal Repayments Savings Regular Savings Superannuation Contributions TOTAL EXPENSES

12 | Life Begins At ... Guide to Financial Independence v1.3 02/17 June July August September October November December

13 Things to discuss with my Financial Adviser

Your first step after reading this guide is to make an appointment with your financial adviser to discuss any issues you may have. Use the space below to jot down the specific questions or strategies you want to discuss with your adviser before the meeting, then take this guide along with you.

14 | Life Begins At ... Guide to Financial Independence v1.3 02/17 Never underestimate the power of a well-made decision Morgans Financial Limited ABN 49 010 669 726 AFSL 235410 A Participant of ASX Group | A Professional Partner of the Financial Planning Association of Australia Level 29 123 Eagle Street Brisbane QLD 4000 Australia GPO Box 202 Brisbane QLD 4001 Australia

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