What sort of retirement advice do I need?
Some people come to see us with the view that the purpose of retirement planning is to decide what superannuation products to invest in. This common misconception results in people thinking about investments when they should first be thinking about what they want to do as the basis for developing a structure which will satisfy lifestyle needs and objectives through retirement.
It is important to differentiate between advice on strategy and advice on investment. In this commentary we summarise some of the issues of advice and investment which characterise good retirement planning.
The starting point for thinking about retirement is in the realm of hopes and dreams – what you want to do in the years ahead – five years – ten years. Developing your lifestyle objectives forms the basis for developing your retirement strategy.
In the early years of retirement (or partial retirement) people tend to undertake the things they have not previously had the time or capital to do. This may include such things as travel, study, home improvements or the purchase of a vehicle or other equipment. The early years tend to be the heavier spending years of retirement.
As time passes and people age they tend to be less active. Income and capital needs can drop away. At the same time opportunities can arise for the buffering of total income through the inclusion of part age pension.
Good planning will look at these issues in terms of planning periods, starting with lifestyle needs and addressing the income and capital needs for each planning period. It will take account of issues such as age pension efficiency and the income tax efficiency that is available in the superannuation world from age 55.
Only when that is done is it appropriate to look at the investment options which will meet your needs across each planning period.
In accessing advice it is essential to work with an adviser who has an established reputation in the areas of client relationships and planning quality- a person with whom you will feel comfortable working over time and who has a history of providing continuing service and support to clients.
Changes in your personal circumstances, in income or capital needs or changes to superannuation, tax or age pension rules over time are best addressed with an adviser with whom you have established a relationship over time and who remains familiar with your situation and supportive of you.
Too much of the advice given to people entering retirement does not take the approach outlined above. Instead it is directed towards selling.
A superannuation fund, for example, may offer only one or two superannuation products – perhaps a superannuation accumulation fund and an account based pension (formerly called an allocated pension) . The fund may employ general advisers with their role restricted to product information. Advice is limited to placement of superannuation capital which is always directed to one or other of the superannuation fund's products.
This may be dressed up as retirement planning but it is not. The advice is not and cannot be directed to your personal situation and circumstances, needs, objectives and strategy. It is a mechanism to sell product.
Once appropriate personal planning has been done, however, it is time to put in place an effective structure to service income and capital needs across the planning periods. And superannuation products will form a part of most efficient retirement income and capital structures. The primary reasons for the use of superannuation products as part of retirement structures arise from two sources:
¨ the tax concessions available to superannuation income streams and capital structures in retirement and
¨ the friendly nature of Centrelink rules in the treatment of certain superannuation income and growth products as they apply to benefits such as Age Pension and Allowances.
There are hundreds of superannuation retirement products available in Australia. Some are income products, some are growth products and some seek to include the characteristics of both income and growth. They include cash funds, fixed interest funds, share funds and property funds and they include funds which contain a mix of asset types – with three common designations being balanced, diversified and growth funds.
How then do you choose from the hundreds of options available? A short commentary cannot address this area in detail. In implementing plans for clients there are many matters which are important in fund selection.
Some of the issues we take into account in establishing a portfolio are:
¨ diversification across different types of assets
¨ the use of funds which focus on high quality assets
¨ the inclusion of a number of fund managers with different and complementary strategies
¨ a preference for actively managed funds which seek to add value and which have a defensive strategy rather than passive funds with no defensive strategy
¨ the volatile Australian dollar and the attendant risks in some international investment
¨ a bias in retirement structures towards Australian assets
¨ appropriate time periods for different types of investment
¨ short and long term risk to income and capital
¨ availability of anti-detriment benefit
¨ availability of quality transition pension options
¨ the risk tolerance of the client.
It is essential to establish a structure with which a client is emotionally comfortable. Unless, you, as a client are comfortable with the suitability, quality and risk profile of a proposed portfolio in terms of your needs and objectives you should not proceed.
Whilst the above represents only a sample of the issues considered it gives an indication of the rigour which needs to accompany implementation of a retirement strategy.
Value and Cost
Establishment of an appropriate retirement model is a demanding task. Most people do not have the technical or strategic expertise to do it themselves because it is something they do only once in their lives and the rules and options are complex. It often involves the most major planning and investment decisions that a person will make in their lives.
And yet many people seek to obtain the cheapest advice they can find. In most areas of our lives we do not seek to buy the cheapest product because we know it is unlikely to be what we want. What we seek is good value for money in obtaining the quality which best satisfies our requirements.
Developing a retirement strategy and implementing it is no different. A good plan should be unique to you and enhance your capacity to achieve your lifestyle objectives. Advisers benefit from having clients and superannuation funds benefit from having funds under management. Your should seek good ones rather than cheap ones. Your life may depend on it.
Retiree Case Study – An Efficient Income
Bob and Jan are long term clients who put together their retirement strategy in the run up to Bob's retirement at age 55. Over the past ten years - the first planning period - they have indulged their passion for travel and used some capital for travel both overseas and within Australia.
Having reached age pension age they are now in the second planning period.
Bob receives an ESS Pension of $26,000 p.a. and Jan receives superannuation allocated pension income of $15,000 p.a.
In addition they receive Age Pension as a couple of $26,000 p.a.
Information published is of a general and summary nature only and is neither represented as being, nor is intended to be, personal advice on any matter. No person should act on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances.