Due to the rising cost of living and uncertainty over how United States President Trump’s policies will impact their investments, older Australians are worried that they might not have accumulated sufficient wealth to satisfy their retirement aspirations. In a recent interview with Azzet, Andrew Zbik Senior Financial Planner at CreationWealth walks readers through some common mistakes and misnomers people often make when thinking about retirement.
Azzet: So Andew what sorts of issues are your clients currently grappling with?
Andrew Zbik (AZ): There’s a lot of resentment by a lot of my clients that people who haven’t saved for their retirement will be entitled to the full age pension – which gives a $1000,000 to a couple over 25 years – while as self-funded retirees they receive nothing. Frankly, I try to remind them in the nicest possible way that this thinking is flawed. For starters, as self-funded retirees they can expect a more comfortable retirement than the age pension allows for. That’s especially true for people who enter retirement with a mortgage or those who are renting. Secondly, it’s not true that self-funded retirees are rewarded with nothing for having provided for their own retirement. For example, once their super balance is in accumulation phase they pay nothing in tax. Given that most of our clients have self-managed super funds (SMSF), only around 10% would be getting any age pension entitlements.
Azzet: Retirees often live frugally A) because they don’t know how long they’re going to live, and B) because they’re hell bent on leaving a legacy for their kids. Is this still an issue?
AZ: Yes, this remains a big issue. I think many retirees struggle with spending in retirement because they’ve spent a lifetime accumulating. While many retirees try to live frugally, they don’t need to and frankly they’re miserable. We spend a lot of time reminding clients that the superannuation system was designed specially for retirement and that they can actually afford to draw down some capital. Yes, retirees still worry about providing for their children and given that most people die with sizable super balances intact, these concerns are largely unnecessary.
Azzet: What other big mistakes do retirees make?
AZ: One of the biggest issues is leaving money in super at the end of their lives so that their children end up sharing their inheritance with the federal government. One of the issues is that a lot of these people don’t see themselves as comfortable, despite being self-funded retirees, and since 2015/16 we saw a lot of middle-class people moving into the area where they had too much to qualify for any age pension. This explains why a lot of retirees aren’t seeking financial advice; they simply don’t believe they can afford it. While ASFA’s cost of retirement report claims a retired couple needs around $74,000 annually, a lot of our clients are spending $95,000 to $120,000. Another doozy we see all the time is that those with large cash savings very often don’t invest it. Instead of contributing it to super they will roll it over into another term deposit where it might be losing them money. The better option is to only keep enough cash in reserve to cover expenses for 12 months to ride out market downturns.
Azzet: People who finally reach age 65 are often encouraged to open accounts so they can dial their super tax down to zero but is that always a wise idea?
AZ: Well, not necessarily. I had this issue recently with clients (65) who were able to retire after selling their business. Rather than drawing money from a tax-free environment, there is an argument for living off cash reserves, and we always suggest that all retirees have sufficient money to live off for three years. This also ensures they don't have to draw from other assets when markets go down. Just because they open an account-based pension doesn't mean retirees can no longer accumulate wealth. They also have the option of shutting down an account-based pension at any time and putting funds back into an accumulation account.
Azzet: Family trusts have been in and out of favour in recent years. What's your opinion of them now?
AZ: They are becoming more popular and especially with our more wealthy clients, especially if they’ve got say $1 million in surplus cash and can’t put it into super because it's maxed out. The next best thing is a family trust which will outlive you when you die. From year to year you can allocate part of your income to family members at lower tax rates, like children who are still dependents.
Azzet: With all the uncertainty around capital markets since President Trump came to office what are you saying to clients?
AZ: We now think capital preservation is more important than trying to grow your capital. We are currently overweight defensive assets and don’t think the extra returns from equities justify the risks. One of the best ways to allow for black swans or geopolitical events is to keep money in a defensive portfolio. The key is to get people used to the idea of a lower earnings environment. We expect 10 year earnings to revert to mean around 6%.