20 NEWCASTLE HERALD Thursday, August 13, 2015

business PERSONALFINANCE

Keeppensiongoalson trackNOELWHITTAKER

Long-term projections of

the money needed for

retirement are pointless.

Noel Whittaker is the author of Making Money Made Simple and numerousother books on personal finance. His advice is general in nature andreaders should seek their own professional advice before making anyfinancial decisions. Email: noelwhit@gmail.com.

Australia is borrowing

$100 million a day to pay

its bills, and this state of

affairs cannot continue

indefinitely.

‘‘DO you really need a milliondollars to retire?” It’s the questionthat has been dominating the mediaall week. But it’s a pretty sillyquestion when you think about it,because there are a multitude offactors that determine how muchanybody would need to retirecomfortably. These include the stateof your health, the extent of travelyou are planning, and how often thechildren are likely to put their handsout for help.

You’ll also need to take inflationinto account. Suppose you are 50now, and have decided you will need$50,000 a year in today’s dollars tolive on if you decide to retire at age65. If inflation was 2 per cent thatwould equate to $67,400 a year, but ifinflation increased to 4 per cent thatfigure would leap to $91,000 a year.

For a person aged 65 who thinksthey will live until age 90, the roughrule of thumb for working out howmuch you will need to accumulate isapproximately 15 times yourexpected expenditure. Therefore,based on the figures above, thetarget could well be between$1 million and $1.4 million.

Of course, if inflation is running at4 per cent, you should be able toachieve a much better return onyour portfolio, which would makeachieving the target somewhateasier.

In short, long-term projections ofthe amount needed for retirementare pointless. What you need to do isdecide when you want to retire, howmuch you think you will need, andthen meet with your adviser at leastonce a year to find out if you are ontrack to meet these goals; and if notwhat strategies need to be put inplace to get you back on track.

It’s also important to take intoaccount what legacies it’sreasonable to assume may comeyour way.

Even though a bequeathed assetmay be years away, it’s still worthconsidering when planning howmuch you need to invest now.

A key factor in the amount you willneed to accumulate is the rate ofreturn you can achieve on your

portfolio. I am still receiving astream of emails about theforthcoming pension changes fromretirees who have nearly $1 millionin assets, entirely held in cash,because they are scared to diversifyin case another global financialcrisis happens.

They could well end up paying avery high price for this if ratescontinue to fall further, which ishighly likely; and in 2017, when theylose the part pension they’re gettingnow.

The following example illustratesthe importance of a diversifiedportfolio that is producing a goodrate of return.

A person aged 50 now who had

$350,000 in super, and wanted toretire at 65 with an income of $50,000in today’s dollars, would be on trackto achieve that with no furthercontributions if their portfolioproduced 8 per annum. However, ifthe best they could do was 5 per centper annum, they would need tomake additional contributions of$18,000 a year to achieve their goal.

But what about the age pension?Yes, at current levels most retireeswill be eligible for a substantialpension, but it would be a braveperson to base their retirementplans on the assumption that today’sgenerous age pension will lastforever.

Australia is borrowing$100 million a day to pay its bills,and this state of affairs cannotcontinue indefinitely.

It’s not hard to envisage a situationa few years down the track when thegovernment of the day will start toask why any retiree with, say, a fewhundred thousand in financialassets, should be eligible for helpfrom the government.

Q I have recently sold my firstproperty and have $250,000,

which will be the deposit for my nextproperty. I am planning to buy again inabout one year’s time – what would bethe best strategy for investing thismoney?

A For a timeframe as short as oneyear, you cannot afford entry or exit

costs or the possibility of your moneydropping in value because of marketfalls. Stick with the high interest onlineaccounts offered by the major banks.

Q In a previous column I noted aninquiry from a woman – both she

and her fiance had a principalinvestment. She said that his was aprincipal residence, because “it was

tax-free as it was under the six-yearrule”. I gathered, maybe in error, thatshe meant the rent he was receivingwas tax-free, rather than any capitalgains tax (CGT) applicable if he sold it.I dounderstand the six-year “rule” butdid not realise that the rental you receivedwas tax-free! Have I misinterpreted herwording or is the rent really tax-free?

A The six-year rule refers only toCGT. It allows a person to be

absent from their principal residenceand maintain the CGT exemption,provided they do not claim any otherproperty as their residence in that time.If a property becomes tenanted, therents are assessable income andoutgoings such as interest and ratesare allowable deductions.

Should you reduce the mortgage or top up super?

Investing in superannuationcarries a clear tax advantage formany workers.

By ALEX BERLEE

Alex Berlee is a financial adviserwith AMP

The two most common financialgoals for most Australians are toown their own home and to build adecent nest egg for retirement. Andthey’re often tackled in this orderwith the priority being to pay off themortgage first, then focus on savingfor retirement later. But is this thebest approach?

In many cases, it can pay to thinkthrough your options.

When asking the question, ‘‘mysuper or my mortgage’’, reducingthe mortgage has a lot going for it.First of all – it feels good!

We like the idea of getting out ofdebt and paying extra to clear themortgage shows meaningful,guaranteed results that you can seeonline or on your monthlystatements.

These extra payments are easilyaccessed through redraw or offsetfacilities, unlike super for those

under preservation age. Also infavour of the mortgage is the abilityto use your home as security forfurther borrowing – reducing yourhome loan frees up equity forgearing into another property or intoshares or managed funds, usingaffordable mortgage finance.

Countering this, there are anumber of factors in favour of astronger or earlier focus on super.At the moment, mortgage rates areat historic lows, so the returns onextra mortgage payments are quitelow, especially compared withlonger-term returns from balancedor growth-based super portfolios.Investing in superannuation carriesa clear tax advantage for manyworkers.

With before-tax supercontributions broadly taxed at15 per cent, compared with wages atup to 49 per cent, salary sacrificemeans you have more of your moneyworking for you.

Consider someone earning$100,000 a year, and looking to direct$500 a month into extra mortgagerepayments. Their alternative is asalary sacrifice of $820 a month, thedifference being income tax. Aftersuper contribution tax of 15 per cent,this still leaves $697 a monthaccruing in super.

Assuming a mortgage interest at5 per cent on average, and superreturns at 7 per cent net of tax onaverage, after 10 years thedifference is $77,641 reduced off themortgage, or $120,640 added to super.Obviously a lot of factors come intoplay, including people’s attitude todebt, but that’s a big difference.

Starting early means you havemore time for compounding to do itsthing, and people who can startcontributing more to their super atan earlier age could consider a moreaggressive investment strategy fortheir super – generally increasingthe long-term returns.

For some people, it can makesense to hedge their bets by startinga modest level of salary sacrificealong with a smaller level of extrarepayments.

This can be effective for peoplewho have already made goodprogress on their mortgage and havebuilt a decent safety net of

accessible funds, but who aren’tready to fully commit to super. Withsuper contribution limits beingmuch reduced, compared with thoseavailable just a decade ago, manyempty-nesters can be left wishingthey’d started their super earlier.

Just when the kids have left homeand the house is paid off, they canafford to add some good amounts tosuper, but can be caught by the caps.For many people another thing toconsider is if the mortgage might becleared by downsizing their home atsome point.

When thinking super or mortgage,it makes sense to weigh up bothoptions in terms of risk, liquidity,return and tax efficiency to work outthe right strategy or combination ofstrategies for your unique situation.