Working hard today so that one day we no longer have to work is the goal of most Australian families. This month we look at the different ways in which most of us save for our retirement and how we can most effectively utilise each of these retirement avenues.
Overall there are 5 main vehicles used by Australians to fund their retirement lifestyles. These are superannuation investments, non-superannuation investments, business assets, social security, and the home. Even though most of us only rely on 1 or 2 of these pathways, its a good idea to have a clear understanding of how all 5 work both separately, and, together.
Since its nationwide implementation in the '80s and '90s, super has become the main retirement savings vehicle for millions of Australians, which is mainly due to its mandatory nature. It also has a distinct tax advantage over other investment accounts with concessionally taxed contributions, earnings and withdrawals (the last two tax-free after age 60!). Superannuation funds growth is only set to accelerate as more people become accustomed to how to use their super, and as a greater number of the workforce start becoming "life-long" members. Increases to the super guarantee contributions rate to 12% will also force the expansion of the superannuation route, though persistent meddling with superannuation legislation, limits and tax rates may be of concern to some.
Though missing significant tax concessions, assets held outside of super do have the important benefit of being accessible prior to retirement. The 3 major non-super investments would most likely be property, cash at the bank and share portfolios. The well-loved investment property has been borne out of both organic collection through upsizing (and keeping old house as a rental) and speculative investing. There are many who plan to simply live on the positive cash flows of numerous investment properties throughout their retirement years. One area of considerable growth over the past few years has been that of annuities. The purchase of an annuity upon retirement can help to both stabilise income received and also reduce the risk of living too long (as income payments will last until death and generally be indexed).
Small business owners tend to plough most excess capital into the business instead of making extra contributions into superannuation and/or other investments. So by the time retirement approaches, a significant part of assets can be tied up in the business including the value of intangibles such as a customer base or goodwill. The big issue for business owners is successful succession planning, so that the full value of business assets can be realised as either a business sale or as an ongoing profit share. There are various tax concessions available to certain small business sales including the ability to contribute sale proceeds into the potentially tax-free superannuation environment.
Even with an adequate amount of preparation and savings, many of us will still be entitled to the age pension (either partially or in full) and other senior Australian concessions and benefits. These entitlements help increase the standard of living for most retirees by providing both income support and reductions in other necessary living expenses. Though we do live in a reasonably generous welfare environment, social security only provides a safety net for retirees and should be supplemented with at least one of the other avenues of retirement.
Often overlooked, accessing capital from the value of your home can be an effective way of increasing your income in retirement. The first method is downsizing to release capital. The second method is an equity release package. Most would view the latter as a "last choice" or "fall back" solution, which is generally accessed via a reverse mortgage or similar mechanism. Most of these financing arrangements come with a moderately high rate of interest, but do come with the benefit of never having to make any repayments if so desired. There are also Centrelink benefits from accessing home equity versus drawing down capital from other assets, though care should be taken before entering into any such arrangement.
In conclusion, all of these avenues can be beneficial when considering how to structure your retirement savings. Whether you want to maximise tax benefits, Centrelink entitlements, flexibility or the value of the family home or business, a combination of these structures will most likely be the most prudent approach. In saying that, superannuation is still going to be the most effective for the majority, and those relying solely on one of the other vehicles should look at ways of perhaps participating in the tax benefits afforded within super environment.
LBW Financial Services Pty Limited is a Corporate Authorised Representative of Wealthsure Pty Limited (AFSL Lic. No. 238030)
LBW Financial Services Pty Limited is an authorised representative of Wealthsure Pty Ltd, AFSL 238030, ABN 93 097 405 108. The information contained within these articles is of a general nature only. Any rates (tax rates, Centrelink rates, exchange rates, etc) are correct at time of publication and are subject to change. Whilst every care has been taken to ensure the accuracy of the material contained herein at the time of publication, neither the author, authorised representative, nor licensee will bear responsibility or liability for any action taken by any person, persons or organization on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organization should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.