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Self Managed Super Fund (SMSF) Article
Overcoming Retirement's Eight Hurdles

By Tony Negline.

This article may be out of date.

6th August 2008

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There are eight big themes that retirees grapple with when working out how much income they will have in retirement: government benefits (such as the aged pension and concession cards), taxation, super rules, regulation changes, retiree consumer price inflation, estate planning, longevity and investments.

Finding a way through these six issues is never easy.  Most investors find it impossible to work out a suitable solution themselves and the only way to move forward is to seek out suitable advice.  Finding a suitable planner can be hard work.

Surveys of planners’ clients consistently show that planners fail to deal with clients in the way that the client wants to be dealt with especially on an ongoing basis.

Investors tend to under-estimate and under-value the huge amount of work some planners do to prepare a financial plan.  Any investor who has sought the services of more than one planner will know the feeling of utter confusion when one planner’s solution, which looks fine, is diametrically different to another plan, which also looks fine.

How can solutions be so different?  In most cases there is no right or wrong answer.  Sometimes the suitability of a strategy – investments or structural – will not be known for many years.  For example anyone who five years ago invested in a range of investments may have been very happy until some of those investments failed sometime in the last twelve months.

A common mistake is to solve current problems without looking forward to the next twenty or thirty years by stress testing a preferred strategy against a large range of potential solutions.

Let's consider the recent $1 million undeducted contribution opportunity which finished in June 2007 as an example of how constant regulatory change can have a big impact on retirement benefits.

On the one hand there were people who ignored the deadline and now regret not taking advantage of it.

On the other hand some investors who were short of their own money resorted to borrowing money simply to take advantage of this 'opportunity'.  Before June '07 the sharemarket seemed to be heading inexorably higher and many of these people piled these new contributions into the market.  By early August last year the financial market corrections had started and the Australian share market is still about 18% lower than it was one year ago.

Since the borrowings were taken up, interest costs will have gone up by about 15%.  To make the strategy a little bit more profitable some of these investors will have claimed the borrowing costs as a tax deduction.  In most cases this interest cost will not be tax deductible.

One consequence of the system changing so constantly is that it is impossible to tell how well some changes have worked because most regulatory measures are not around long enough for anyone to make an objective assessment of their usefulness or suitability.

Every political party wants to stamp its philosophy on the retirement system.  The current government has said that it's review of the tax system, being conducted by Treasury head Ken Henry, "will seek ways to reduce the pressure of the ageing population on the public purse through reform of pension and superannuation systems".

Moreover Senator Sherry, the Minister responsible for superannuation and corporate law, told The Australian last month that he has "a 'a list a mile long' of issues connected with superannuation and retirement planning that he may put to the Henry committee".

The urgency of dealing with longevity cannot be under-estimated.  Last week the Minister for Ageing, Justine Elliot, released some very important research prepared by the Department of Health and Ageing which predicts that by the "mid-century most Australians can expect -on average - to live to their mid-to-late-80s".

Minister Elliot also noted the remarkable modern historical improvement in our longevity.  In 1901/10 women were expected to live for almost 59 years and men for 55 years.  One hundred and fifty years later women will have an approximate life expectancy of 88 years and men 84 years.

The latest Intergenerational Report released last year shows that most of the budgetary problems that are expected to arise over the next 40 years come from dramatically increased aged care and health care costs.

What about the variability of investment returns?  Recent media reports suggest that some retirees are becoming particularly concerned about financial market performance and the impact it can have on their retirement dreams.

For example suppose a retiree started an Account-based income stream which person retired in March 1982 with $400,000 and they want at least $34,000 per annum income each year.  (Let's ignore that these products were not allowed at that time.)  Assume that they invested half this super income stream money in the ASX 200 and the other half in one-year term deposits.  After 20 years the investor would have received $870,000 in income payments and still have an account balance of $940,000.  However if our investor had started the income stream in March 1987 then after 20 years they would have received $690,000 in income but would have only an account balance of $68,000.

It's hard not to argue that these differences are quite stark.  And these are just two iterations.  And this is the problem of single figure projections based on an average.

The eight great unknowns for retirees:

  • government benefits
  • taxation
  • super rules
  • regulation changes
  • retiree consumer price inflation
  • estate planning
  • longevity
  • investments market volatility

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