5 different Strategies to fund retirement

Discussion in 'Investment Strategy' started by Terry_w, 8th Jul, 2019.

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  1. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    Retirement can be funded from 5 basic classes of income/assets, which are:

    1. Income

    2. Capital gains

    3. Capital

    4. Borrowing

    5. Government pension



    Income is the obvious one. You invest in shares or property and receive dividends or rents. You could also work if you had to.


    Capital gains is also relatively obvious, but often not considered by the ‘never sell’ type.

    Capital gains are often better than income because they are taxed at half the rate of income (using the 50% CGT discount). Capital gains can be obtained by selling longer term held assets such as shares or property.


    Capital, or Corpus, is not usually considered directly, but many financial planners and government websites assume you will eat into your assets so that on the day you die you will have $1 in the bank. This is similar to capital gains, but different because you are eating into the original cash you have contributed to the investment there is no tax payable.


    This could be cash in offset accounts – which can be a great way to fund retirement as where the offset is attached to an investment loan the increased interest will be tax deductible.

    It could also be from the proceeds of shares of property after they are sold.


    Borrowing is still possible, but it will be very unlikely most people will be able to utilise this in their retirement. One way to possibly do it is to borrow as much as possible just before retirement and to slowly use these funds. Another way is the reverse mortgage products.

    One method rarely considered though is borrowing from children to fund your retirement. This can benefit both parent and child because instead of selling that property and losing future growth, paying extra tax etc, the child could lend you some money on the expectation of inheriting the property at a later date.


    The pension is the backup strategy for many– government will fund your retirement if all else fails. Some can also get a part pension combined with part from one or more of the other classes above.
     
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  2. Redwing

    Redwing Well-Known Member

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    Great to put some scenarios and numbers together @Terry_w

    The BFI had his Bradman Strategy

    At a minimum, you need a paid-off home, plus:

    Couples: $250000 in super

    Singles: $170000 in super.

    Make this your ‘retirement number’. To be clear, this is the number you need to nail before you even think about retiring—and that’s in addition to owning your own home outright. So how much dough does a comfortable retirement cost? According to the Association of Superannuation Funds of Australia (ASFA):

    $59000 a year for couples and $43000 a year for singles.

    At this point you’re thinking, ‘Does this plan of yours involve me holding up convenience stores with cricket bats? Because I can’t see how my $250000 will afford me a $59000 per year lifestyle’. Let’s head to the crease.

    Rule 1: You must have the banker off your back

    This strategy only works if you retire debt free…as in no mortgage. Even better, the Age Pension doesn’t take into account the value of your family home. (Which means that, theoretically, James Packer could cash in his chips when he’s older, buy a $7 billion home and collect the Age Pension.) You need to own your own home—debt free—before you retire.

    Rule 2: Nail your number

    You can’t retire until you’ve nailed your retirement number as a minimum (more money is better): $250000 in super for couples and $170000 for singles. Hang on, what’s so special about these numbers?

    This is the maximum dollar amount of assets (excluding your family home) that you can have and still get close to the maximum rate of Age Pension. At the time of writing, the maximum rate of Age Pension is $34252.40 per year for couples and $22721.40 for singles. And it will get you 60 per cent of the way towards your comfortable retirement number on its own.Think of this as your safety net: it’s guaranteed by the government, it’s indexed twice a year to keep up with inflation and it will be paid until the day you die.

    Rule 3: Never, ever retire

    It’s said that the two most dangerous years of your life are the year you’re born and the year you retire.

    Well, it looks like you made it through the first one, so let’s talk about the second. The golden rule of retirement is…keep working. That doesn’t mean you have to keep your existing job (especially if you’re a tiler with dodgy knees). You can do something less labour intensive—just a day or so a week, and it doesn’t need to be every week. Work is good for you: retirees who continue doing some kind of part-time work are found to be the happiest and the least likely to suffer depression.Why not use the skills you’ve honed over your career to do some useful work? I meet so many Uber drivers who are well-to-do retirees who don’t need the money—they just like chatting to people and earning their keep at the same time.

    And better yet, if you do work, the government will bend over backwards to help you.

    Once you reach pension age, you’ll not only be able to draw a tax- free pension from your super, but in addition a couple can earn up to $28974 each without paying a cent of income tax (singles can earn $32279 per year).

    Yet what if your advisor says, ‘You’re a winner, you don’t have to work another day in your life’.Barefoot says, ‘Work anyway, even if it’s a day a week’. The biggest mistake you’ll make with your retirement is to give up working. Let’s take a final look at the retirement scoreboard, after you’ve applied all three rules:

    1. You’ve paid off your home.
    2. You’re getting the Age Pension of $34252.40 (per couple) a year, indexed for life. And you’ve got $250000 in super. (This will pay you a tax-free income of $12500 a year.)
    3. You and your partner each work just one day a week to bring in a combined $20000 a year, completely tax free.
    Total: $66 752.

    That’s almost $8000 more than you need for your comfortable retirement! Ker-ching!
     
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  3. Redwing

    Redwing Well-Known Member

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    Nick Bruining says in

    Don’t Panic: More reasons you don’t need $1 million to retire well


    “That’s why they will never tell you that a couple with $270,000 in superannuation and savings can easily generate an after-tax income of $48,000a year, have it indexed for life, using lower-risk strategies and still have funds for travel and other fun things,” he says.
    • How a couple with $270,000 in super and savings can retire on $48,000 a year — tax free
    • How to make sense of your super statement and know you aren’t getting ripped off
    • Nine ways to boost your super
    • How a couple can earn $92,000 a year and still get some of the age pension
    • How to choose a good financial planner and what you should pay
    With $250,000 in total super and savings, you’ll qualify for close to a full Age Pension of around $36,000 a year. Using an account passed pension and drawing the legal minimum of 5 percent on that $250,000, the age pension will be topped up by $12,500. Bingo! That’s $48,500 and before we even weigh in with the considerable discounts attached to the pension concession card.

    If you have more than $250,000, then that’s great news as you have plenty of money to make choices about when to stop work, what sort of holidays you can take etc. More money means you might get less Age Pension
     
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  4. Scott No Mates

    Scott No Mates Well-Known Member

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    @Redwing - I better start spending and divesting so I can get the pension ;)

    @Terry_w - isn't borrowing from your kids in the vague hope that you might put them into the will to inherit those assets risky (for them)? I know of several people who have had all good intentions of ending up with the family home but as one parent died the other remarried and they ended up with nothing.
     
  5. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

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    Yes it certainly is risky so legal advice should be sought, but if your family dynamics allows it to be done you can end up with amazing asset protection and tax savings. I have a client who actually did this with his mother dying a few years ago.
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

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    She wasn't going to run out and get a new partner too quickly (unless her live-in carer decided that they were a defacto and put their hand up - which also happens).
     
  7. balwoges

    balwoges Well-Known Member

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    There are older people around like me who didn't have access to super, my super was a commercial building now sold. I thought very carefully about how I would use the money from the sale and decided I would buy blue chip shares [with imputation credits] which bring me in a decent income and I keep sufficient cash to cover me for 3 years living expenses. I am a lot older and wiser now :rolleyes: having seen the ups and downs of the money markets over many years and I figure if the share market halves in value I would still get by with the cash I had saved and a part pension.
    However, I do gamble by buying shares for the dividends and selling after 45 days with some of my cash - so far I am in front ... :D
    The pension was in reach if I got rid of some of my assets, however couldn't see the sense of going down that path.
     
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  8. TAJ

    TAJ Well-Known Member

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    Numerous friends of mine (mainly married couples) receive Super pension income monthly, coupled with Part Pension payments fortnightly. I believe they enjoy the fact that they have the backdrop of the Part Pension and health cards. Some did sell off assets to come below the income threshold.
     
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