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Five steps to avoid outliving your super

June 2019

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It was only a few generations ago that our average life expectancies hovered around the half-century mark. Today, Australian males on average live for 80.4 years and females for 84.5 years. Those averages are dragged down by people who pass away early. That means, if you make it to retirement age in reasonable health you’ve got a good chance of living well into your late 80s or even 90s.

That’s good news. But it means many of us are going to have to adjust our approach to superannuation.

Here are five steps to help ensure you don’t outlive your super:

1. Make extra contributions to your super

RetireInvest Castle Hill/Hornsby financial planning manager Mark Robinson argues people should take advantage of their peak earning years. “Few people in their 20s and 30s think about their retirement and make voluntary super contributions,” he says. “As a result, they have to make an extra effort in their 40s, 50s and 60s to direct any spare cash into super.”

Making an effort early in life is truly worthwhile, says Deakin University business school Associate Professor Adrian Raftery. “It’s worth noting the government only starts levying extra taxes on super balances once they exceed $1.6 million. So even if someone puts in the maximum tax deductible contribution of $25,000 every year for 40 years it still only adds up to $1 million.”

If you include the compound interest on that, the final super balance would be far above $1 million.

That’s an incremental approach to building your super balance, but in some cases, giant leaps can be taken which could dramatically change how much super you retire with.

“Individuals can have a windfall as a result of receiving an inheritance or selling a business,” Raftery says. And they can use that to take advantage of catch-up concessional contributions reforms (from 1 July 2019): “If they have a super balance of under $500,000, they can direct that into their super without paying much tax. Also, retirees who downsize can now put $300,000 of the sale proceeds into their super tax-free.”

2. Be realistic about your retirement

“People are prone to misjudge how long they’ll live for and what their expenses during retirement will be,” says Robinson. “The default assumption is we’ll live as long our parents did. But, especially if we’re leading healthier, less dangerous lives than they did, we’ll probably be around longer than they were.”

“Also, people assume they won’t have significant outgoings once they’ve paid off the house, raised the kids and are free of work-related expenses,” he says.

“They fail to take into account having to assist a child get through a divorce or enter the property market. They don’t foresee going on regular trips. And they don’t like to think about the likelihood of experiencing costly health challenges.”

3. Have a strategy to get the right amount for you

“Once you’ve reached your mid-60s there are no pleasant options for growing your super balance,” Raftery says. “Either you chase after high returns, with the downside of higher risk, or you live frugally to preserve your capital. Or you stay in the workforce.”

“People should be seeking expert advice around the time they retire and, ideally, long before that,” he continues. “A financial adviser can provide a realistic estimate about the super balance you’ll need to live the lifestyle you plan to lead. They can also run through the upsides and downsides of strategies of downsizing, postponing retirement, shifting more of your super into growth assets and so on.”

4. Consider a range of investment options

“Especially now the tax rules have been tightened up, there’s no need to be obsessed with super,” Robinson says. “You can have income coming from share portfolios or balanced funds that isn’t taxed much more heavily than super income. I’m not so keen on investment properties for those with limited assets elsewhere given they’re illiquid assets, but they can be part of the mix.

“I predict governments will increasingly be encouraging people into investments that produce lifetime income streams. That is, ones that provide a set amount of money each year for as long as you live. There are lifetime annuities that work that way around now but the low rates they offer mean they aren’t popular.”

“There’s a range of different annuities, all of which have their pros and cons,” Raftery says. “In general, annuities work best for those who worry they will be tempted to go on a spending spree and run down their retirement funds quickly.”

5. Invest in financial advice

Lots of Australians retire with inadequate super. Plenty more mismanage large sums of money they’ve spent their working lives accumulating. Robinson and Raftery argue the biggest mistake they see people making is failing to seek professional advice.

“It’s no simple matter calculating how long you’re likely to live, how much money you need to put into super before retirement and how much it’s sensible to be drawing out of it once you’ve stopped working. And that’s before factoring in things such as market fluctuations and governments changing taxation arrangements,” says Raftery.

“That’s why I advise retirees to find a helpful and experienced financial adviser and meet with them on an annual basis.”

To discuss how you could avoid outliving your super, contact your financial adviser.

Written by Nigel Bowen business and lifestyle writer and sub-editor.

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