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Australians need a retirement confidence boost

Australians need a retirement confidence boost

Giving Australians better access to high-quality and more affordable financial advice is imperative.

One of the fundamental principles for achieving long-term investment success is planning.

In fact, the importance of having a clear financial plan, whether it’s formal or informal, can’t be overstated. As is the importance of sticking to it.

Without a well-documented, detailed plan that incorporates specific goals, there’s a fair chance investors will miss out on key opportunities over time, potentially lose their long-term focus and not attain the financial heights they had hoped to reach.

The consequences of this can range from feeling demoralised to experiencing devastating financial impacts, and it’s evident there’s a strong link between having a plan and individual confidence levels, especially in relation to retirement.

The importance of planning

To this point, Vanguard recently released How Australia Retires study found that Australians with the highest confidence about their future retirement were following a financial plan.

After surveying more than 1,800 working and retired Australians aged 18 years and older, they found that people who have a financial plan are six times more confident about their retirement outcomes than those without one.

Australians with the highest retirement confidence have taken the most purposeful actions to prepare for their retirement. Many have accessed professional financial advice, they’re relatively likely to use budgets and prioritise their savings, and they make regular extra contributions into their super.

Broadly speaking, they know what they need to do to achieve the retirement outcome they desire and are optimistic about entering this phase of their life.

By contrast, they found that Australians with a low confidence about their retirement tend to be the least actively prepared.

Often they’ve never accessed financial advice and they have little understanding of how they can achieve their retirement goals. They also expect to be more reliant on the Age Pension after they retire than those with higher retirement confidence.

In addition, they don’t tend to make regular additional super contributions and are generally less optimistic and more likely to feel disinterested, anxious or worried about this later phase of life.

This is typically the case for older Australians who’ve taken less action to prepare over time.

The role of super

Interestingly, only half of working-age Australians consider super an important component of their retirement plan and they expect to rely on it less than existing retirees.

As part of this, more than half of working-age Australians (54%) estimate their super balance constitutes half or less of their total investment balance.

Indeed, one in four working age Australians highlighted investment property as being a big part of their retirement plan. That compares with only one in 10 retired Australians having investment property as an asset.

But of concern is the fact that while super is an important component of total retirement assets, relatively few people actively engage with their super.

In many cases, super is the second-largest asset people have outside of their home. Yet, one in four Australians don’t know what their current super balance is, and one in two are unaware of what they’re paying in super fees.

And most Australians haven’t had any contact with their super fund, often because they rely solely on their employer’s compulsory contributions.

Increasing engagement

This is an area that really needs attention, and there’s a great opportunity for the super industry as a whole to step up their engagement with fund members.

For example, most Australians don’t really understand all of their available options when it comes to making personal contributions into their super account each year. Even making small additional contributions on top of employer contributions can have a big positive financial impact over time.

So can reducing fees, because higher fees equate to lower returns. Understanding what you’re paying in investment fees allows you to do a comparison with other providers and to potentially switch to lower-cost alternatives.

This is where financial advice can play a crucial role. There’s a strong correlation between the use of professional advisers and retirement confidence.

The survey found that of the Australians who have received professional advice, 44% indicated they were extremely or very confident in funding their retirement. Of those who have never sought any professional advice, only a quarter indicated they were confident.

Which is why giving Australians better access to high-quality and more affordable financial advice, that’s relevant to their specific needs, is imperative.

Financial advisers have an important role to play in terms of recommending the most appropriate investment options to individuals based on their needs, but also in terms of behavioural coaching. Having peace of mind is invaluable.

It’s never too early to engage a financial adviser to map out a financial plan that has the best chance of investment success over the long term, so contact us today, so we can help you on your financial journey.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Banking on the Age Pension

Banking on the Age Pension

The ranks of Australians receiving the Age Pension are increasing. It’s important to understand who is eligible and its role in retirement planning.

Just days before the 2023 Federal Budget was handed down on 9 May, the Australian Bureau of Statistics released a new report including data on the number of Australians receiving the Age Pension.

The report, New Census insights on income in Australia using administrative data, has largely flown under the public radar so far.

But it contains some interesting retirement insights compiled from the 2021 Census, most notably that “nearly half of Australians aged 65 years and older receive most of their income from the Age Pension (47.8% or 2,029,000 persons)”.

That’s a powerful statistic, especially when taking into account the “Support for Seniors” expense numbers detailed a week later in the Federal Budget’s Statement 6: Expenses and Net Capital Investment.

Support for Seniors (the Age Pension) has been costed in the latest Budget at $54.87 billion for the 2022-23 financial year, rising progressively on forward estimates to $67.32 billion in 2026-27.

A growing reliance on the Age Pension

One of the key findings from How Australia Retires study, released in May, is that the Age Pension features most prominently among Australians who are still working and who have not taken purposeful steps to prepare for their retirement, and who are more likely to say the Age Pension is part of their retirement..

These steps include having a well-documented and detailed financial plan, ideally prepared by a professional financial adviser, and making extra contributions to superannuation over time.

Australians who have low confidence about their retirement generally have low expectations about the amount of income they’ll likely receive during retirement and believe the Age Pension will form the biggest component of their retirement plan.

The number of Australians receiving the Age Pension is continuing to rise, and has actually increased significantly since the 2021 Census data that the ABS has used in its recent Census insights report.

The Department of Social Services (DSS) Expanded DSS Benefit and Payment Recipient Demographics – December 2022 data shows 2,565,870 people were receiving the Age Pension at the end of last year.

This included 1,783,980 people receiving full pension payments, 393,365 people receiving part pensions as a result of the “income test”, and a further 385,525 people receiving part pensions as a result of the “assets test”.

Under the income test, individuals can earn a maximum of $190 in income per fortnight (and couples $336 per fortnight) from other sources before their pension is reduced by 50 cents for every dollar above the respective allowable limits.

Under the assets test, individuals and couples are assessed on whether they do or don’t own a home. They can hold up to a certain value of financial and other assets before their pension is incrementally reduced for every dollar above the respective allowable limits.

Single homeowners can have up to $280,000 in assets, and non-homeowners up to $504,500, before their full Age Pension starts to reduce. The Age Pension cuts out completely once singles reach maximum asset limits of $634,750 (homeowners) and $859,250 (non-homeowners), with higher cut off points for singles who receive rent assistance.

The same rules apply to couples receiving the Age Pension, but the limits are higher.

Couple homeowners can have up to $419,000 in assets, and non-homeowners up to $643,500, before their full Age Pension starts to reduce. The Age Pension cuts out completely once couples reach maximum asset limits of $954,000 (homeowners) and $1,178,500 (non-homeowners).

The growing role of the Age Pension

The DSS’s demographics data shows that there just under 400,000 Australians aged 66 to 69 that were receiving a full of part pension as of December 2022 – roughly about 15% of the total Age Pension population.

Keep in mind that this is the youngest Age Pension cohort, as individuals can potentially qualify to receive a full or part Age Pension from the age of 65 years and six months, depending on the year they were born.

The largest cohort of pension recipients (about 51%) was aged 70 to 79.

For most Australian retirees, the Age Pension forms a meaningful portion of their retirement income, and for all retirees it should be considered as part of the retirement planning process.

Two key features of the Age Pension – it is payable until one’s death, and it adjusts for inflation over time – make the Age Pension a very valuable benefit as well.

Given this, a thorough understanding of how the Age Pension works, what benefits should be expected, and its role in planning for retirement is critical.

For retirees who meet the eligibility criteria, the Age Pension can act like an inflation-protected, lifetime-income safety net.

This means that Australian retirees who are eligible for the Age Pension can expect to receive a fortnightly pay packet that maintains its purchasing power for as long as they are alive and as long as they continue to meet the assets test, income test and residency rules.

If available, it is a great resource to help meet “basic living expenses” in retirement.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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How emergency funds deliver peace of mind

How emergency funds deliver peace of mind

When life tosses up an unexpected event – such as retrenchment, a medical emergency or even just a big bill to fix the car – it can be nerve-wracking worrying about how to deal with the crisis. And, if funds are short, that just adds to the stress.

But imagine that you have a secret cash stash – an emergency fund – that will cover the costs, giving you the mental space to deal with the problem.

In fact, an emergency fund is the basis for a strong financial strategy and provides a crucial safety net. Regardless of your age or income, it makes sense because the unexpected can happen to anyone.

Without a cash reserve, you may have to rely on credit cards or loans, which can further strain your financial situation and mental health.

An emergency fund gives you the peace of mind to be able to weather the storms that come your way without racking up unwanted debt and interest payments.

How much is enough?

Of course, it can be tough to save when inflation is eating away at your income. Rising interest rates, rents and the cost of groceries are putting a big strain on households. The Australian Bureau of Statistics reports that household savings have declined for over a year as people contend with increased mortgage payments, among other rising costs.

Nonetheless, by putting aside even a small but regular payment into a separate fund you will slowly accumulate enough to cover emergencies.

The size of your emergency fund depends on your own circumstances, but an often-quoted target is enough to cover between three and six months of living expenses.

It may differ if say, you are planning on starting a family and need funds in reserve to cover the difference between parental leave payments and a salary; you have children in school and want to be able to cover school fees for a year or more, no matter what happens; you need to take time off work to care for a family member; or you need to make an unplanned trip.

On the other hand, if you have retired, having a buffer against market volatility can be helpful. If there is a market downturn and your superannuation is not providing your desired income level, a year’s worth of living expenses in an emergency fund can make all the difference to your lifestyle.

The main thing to remember is that if you need to raid your emergency fund, start work on rebuilding it as quickly as possible.

Building your emergency fund

Putting together a budget can help you to analyse how much you can afford to put away every week, fortnight or month. Then, consistently saving until you reach your goal is the key, no matter how small the amount.

It is best to keep your emergency fund separate from your everyday transaction account to reduce the chance of you using your saved funds for regular expenses. One option is to pay yourself first by setting up a direct debit, so your emergency fund grows automatically with no extra action needed from you, and to avoid the temptation to withdraw your savings.

The type of account you choose for your emergency fund is important. It should be readily available so, while shares and term deposits may offer higher returns, they are not quickly accessible when required. Shop around for a bank account that offers the highest interest to get the most out of your hard-earned income.

Building an emergency fund is essential to a strong financial plan, providing a safety net should something unexpected arise. If you are unsure of the best way to set up an emergency fund, we encourage you to contact us. We can provide guidance on the best options for your unique financial situation and help you take steps towards it.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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