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ISSUE 10 MARCH 2016

Retirement Update

BUDGETING INVESTMENT RISK–REWARD AGE PENSION GOVERNMENT UPDATE RETIREMENT SAVING RESOURCES AND MORE...

Busting retirement myths

pensions

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Make the most of what you’ve got

*Transition to retirement strategies can be complex and are not suitable for everyone. You should seek advice to make sure it’s right for you. This general advice doesn’t take into account your objectives, situation or needs. Before deciding, consider your financial requirements and the relevant PDS available at australiansuper.com or calling 1300 300 273. AustralianSuper Pty Ltd. ABN 94 006 457 987, AFSL 233788, trustee of AustralianSuper ABN 65 714 394 898.

Did you know that you can start using your super while you’re still working with a transition to retirement strategy?*

Find out more at australiansuper.com/56matters or speak to an AustralianSuper adviser on 1300 300 273.

YourLifeChoices Retirement Update March 2016 3

Saving your retirementYourLifeChoices is busting the myth that you can’t rescue your retirement.

We all make mistakes but as long as we learn from them, the experience is invaluable. However, it’s obviously better to learn from the errors of others so in this March issue of Retirement Update, we’re busting the myths that surround the seven most common retirement mistakes.

Whether it’s underestimating how long you will spend in retirement, failing to have a realistic budget, not diversifying your investments or missing the important changes to Age Pension thresholds, we offer practical and simple information on how to avoid the big mistakes.

It’s never too late to plan for retirement.

Debbie McTaggart Editor

Contents

16

17

12

10

4

How to budget (in retirement) 4 Kaye Fallick dishes out some tough love on how to budget

Are you assuming you’ve left it too late? 6 Here’s why Wendy Schilg says it’s never too late to save for retirement

Pitfalls of missing Age Pension increases 9 Why it’s important to check Age Pension threshold changes

How long will you live? 10 How to measure your longevity to learn how it will shape your retirement

How to save money for a rainy day 12 Debbie McTaggart reveals some tried-and- tested saving methods

The dangers of not understanding 14 investment risks Noel Whittaker illustrates the risk–reward trade-off of financial investments

How to prepare emotionally for retirement 16 It’s not all about the finances, as Jo Lamble clearly explains

Government and pension update 17 Find out about the indexation of Age Pension rates and threshold changes

Your retirement living costs 18 Have they gone up or down?

Your retirement budget 19 How does your spending compare?

Resources 20 Useful resources at the click of your mouse

YourLifeChoices Retirement Update March 20164

Kaye Fallick dishes out some tough love in her advice on how to budget. Are you brave enough to follow her fail-proof formula to save?

How to budget (in retirement)

… you’ll be so relieved, you’ll stick to your new-found path of frugality.

Way back in 1850 in his eighth novel, David Copperfield, Charles Dickens’ character Mr Micawber revealed the secret to

happiness:

Annual income twenty pounds, annual expenditure nineteen (pounds) nineteen (shillings) and six (pence), result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

In other words, spend less than you earn. So creating and sticking to a budget in retirement follows Mr Micawber’s golden rule to ensure you have financial peace of mind.

If you are starting to feel uncomfortable, that’s perfectly natural, as we’ve just pressed two of the most sensitive buttons: fear and guilt. Fear that you really will run out of money. And guilt because deep down inside you know you are spending beyond your means. And perhaps further fear that this behaviour, if not checked, will lead to financial hardship.

The good news is that you can change this behaviour by adopting the following strategies and sticking to them for one month. By then you will, hopefully, have proven to yourself that there is a better way of managing your money and, since you’ll be so relieved, you’ll stick to your new-found path of frugality.

So how do you turn things around? By reversing your thinking on the best way to spend less. Most of us have been told that this involves having a clear idea of what we spend – daily, weekly, monthly – and adding it up and making an arbitrary cut that matches our income. Wrong! If you’ll excuse the language, this is arse up.

The best way to create a budget is to automatically allocate 10 per cent of your income to a savings account, then consider how the remaining 90 per cent can be apportioned to cover your non-negotiable recurring household expenses. Deduct this amount from the 90 per cent and what you are left with is what you actually have to cover your discretionary expenditure.

For example, let’s say you are on a part Age Pension, supplemented by an income stream from retirement savings, and as a single you receive $30,000 per annum, or near the lower end of what ASFA deems ‘comfortable’. So, a total of $3000 per annum, in regular deductions, will be automatically transferred to a savings or rainy-day account. Let’s then take a total of $17,452 to cover essential household items from the remaining $27,000, which will leave a balance of $9548. In the ASFA table, essential household items include spending on housing, energy, food, telecommunication, car and public transport costs, health insurance, and medical expenses.

So the remaining $9548 is your discretionary budget, which means you can decide which items you will retain, which you will remove and which might be reduced. ASFA projections suggest that $6281 will cover modest

expenditure on clubs, DVDs, alcohol, dining out, cinema and domestic vacations. The decision to create a budget for this discretionary spending is key to emulating Mr Micawber’s advice in order to come up with the six-pence happiness indicator.

Of course, not many of us work with an annual budget, so dividing the amount by 12 will give you a monthly budget which, if adhered to, will enable you to achieve regular savings and remove financial stress. But from day one to day 31, you may be tempted to spend more, so how can you manage this? By clever pre-determined and automated online banking transfers, and even cannier credit-card management.

To do this, create a series of bank accounts and transfers:

• bank account A receives your salary/income, as previously mentioned

• bank account B, which is a term deposit and cannot be accessed, receives an automated deduction of 10 per cent of your salary/income (say $250 per month)

YourLifeChoices Retirement Update March 2016 5

• bank account C receives an automatic deduction of $1454 to pay for non-negotiable household expenses. It is from this account you will set up automatic deductions to pay your essential energy, insurance and telecom bills, as well as rates, a day before the due date. A realistic amount for food should also be included. (Note: we are not using a credit card. Yes, your points will suffer, but your peace of mind will increase exponentially.)

• bank account D (your discretionary spending account) will receive the last auto transfer from bank account A – i.e. the remaining $796. This is the deal breaker. You can spend no more than the deposited balance per month. So take your credit card, place it in a plastic bag and put it in the freezer. Yes, the freezer!

Now you can use a debit card linked to bank account D to pay for the fun things in life. Movies, clothes, hairdresser, local travel, gifts, books and outings are all paid for from this pot of money. And if it runs out, guess what? You go without until next payday at the beginning of the next month. And there is no point in crying poor, especially if your housing, utilities, food and transport are already covered from bank account A. And no, don’t even think of digging into the savings in bank account B. That’s not an option. So this system leaves you with nowhere to run and nowhere to hide, but offers a very achievable financial management plan. What’s not to like about that?

And at the end of one year, the savings account (bank account B) can be used for one of four things:

1. pay down any existing debt

2. gifted or loaned to nearest and dearest

3. much-needed renovations on your home

4. some exciting bucket list travel options.

Yes, you may need to add a little extra for big items such as rates, depending upon the month in which you start.

A cautionary note: if, like me, you are used to maxing out the credit card, then desperately working out how to cover the monthly bill, this system is

guaranteed to mess with your mind. But the upside is far better than the short-term discomfort. Why don’t you try it and see?

$2500

Monthly income Centrelink – $1100 (paid $507.69 per fortnight)Super top up – $1400= Monthly income of $2500Bank account Areceives salary/income $2500

Auto deduction # 1

Bank account B$250

Auto deduction #2

Bank account CHousehold non negotiables UtilitiesAuto deductionsScheduled payments $1454

Auto deduction #3

Bank account D(as debit card attached)

this is a discretionary amount that you can

comfortably afford to spend$796

YourLifeChoices Retirement Update March 20166

If you’re assuming that you’ve left it too late to save for retirement, Wendy Schilg will prove you wrong with her sound advice on what you can do,

no matter how late.

Are you assuming you’ve left it too late?

I f I had a dollar for every time I heard the words I wish I had started saving for retirement earlier, I would be on my yacht sailing the Whitsundays

at this moment. The ideal would be to start putting money away in our 20s, but not many of us did that. Even so, it’s never really too late to start saving for our later years – as there are ways and means of ensuring a financially happy retirement.

The importance of reducing your debt before retiring cannot be stressed enough. You need to look thoroughly at ways of reducing spending. The first step would be to complete a comprehensive budget to determine your current and future cash flow requirements. Include your assets and liabilities and any payout of long service leave and annual leave you’re due upon leaving the work force. Identify areas where you can cut spending – after all, will you really need all those fabulous work suits, two cars, etc.? You can create your comprehensive budget and compare it against the Association of Superannuation Funds of Australia Retirement Standard for the December 2015 quarter.

Once you have determined your financial situation, take the next step of looking at your short- and long-term needs and objectives. You may be able to take advantage of options available to maximise your financial situation – such as topping up your super via salary sacrifice if you’re still working, a transition to retirement strategy, income splitting, etc.

While most people have heard of salary sacrificing into superannuation, some are less familiar with a transition to retirement (TTR) strategy. A TTR strategy allows people who are between preservation age and age 65 to remain gainfully

employed and access their superannuation. There are ways to structure a TTR strategy to make the most of pre-retirement income.

Salary sacrificing into superannuation, especially if you can start in your early 50s or sooner, will have a significant and beneficial effect on your retirement income. It has long been known that in most cases our current 9.5 per cent contributions will not be enough to ensure a reasonable income in retirement.

Some people baulk at seeking advice from professional financial planners because they feel they don’t have sufficient money to pay for their services – but believe me, it’s cheaper to pay for advice than lose money through making bad financial decisions.

There are some people who have been bitten by bad financial advice, but keep in mind not all planners are the same – it pays to research when seeking a trustworthy source of advice. Ask friends who they use, search on the internet

for financial planners close to you, contact the Financial Adviser/Planner Associations who can supply you with a list of member planners and check ASIC’s Financial Adviser’s Register at www.moneysmart.gov.au for licensing, qualification and education details.

Remember that you don’t have to sign with the first planner you interview – keep interviewing and asking questions until you find one with whom you feel comfortable has your best interests at heart. In most cases this is going to be a long relationship, so be sure to find the right one. Keep in contact with your financial planner – after all they are investing your money for your retirement.

It’s never really too late to start saving for our later

years.

YourLifeChoices Retirement Update March 2016 7

If your situation isn’t complex or you really do have too little to pay for professional advice, you may be able to research and find enough information to be confident in making your own financial decisions. If this is the case, and you are sure that you have the confidence and expertise to manage your own financial affairs, make sure you keep up to date with the ever-changing investment rules and regulations.

We received many calls through the National Information Centre on Retirement Investments (NICRI) information line from people who didn’t understand superannuation, Government Income Support or investment concepts. They did not know where to begin or how to access the relevant information, rules and regulations. After accessing the information, though, many were empowered to make financial decisions and take control.

One of the most common questions people approaching retirement ponder is how much they will require and how much they will have in retirement. Fortunately there are many online calculators that can help consumers understand their situation and set realistic goals. According to the ASFA’s ‘Retirement Standard’ for the December 2015 quarter, a couple aged 65 would require an income of approximately $59,236 pa ($43,814 pa for singles) to live a ‘comfortable’ lifestyle. A ‘modest’ lifestyle would require $34,226 pa

($23,797 pa for singles). ASFA’s Super Guru website has a range of calculators that are very helpful.

Whether you obtain professional advice or go it alone, be sure to get started sooner rather than later. Get in touch with retiree member organisations and investor associations to see how they may be of assistance, use the Department of Human Services Financial Information Service and, of course, use informative sites such as YourLifeChoices.

Please note that the information in this article does not constitute or imply financial advice. It is recommended that you seek professional financial advice and/or seek clarification from any relevant government department or financial services provider before making financial decisions.

Wendy Schilg is the former CEO of the National Information Centre on Retirement Investments Inc (NICRI). NICRI closed in 2015 when government funding ceased. She has worked in the consumer area for 26 years and now runs her own consultancy business.

YourLifeChoices Retirement Update March 20168

Sponsored message from AustralianSuper

Don’t put all your eggs in one basket

As individuals we all have different financial needs. So one of the biggest mistakes that you can make when saving for your

retirement is assuming that superannuation is a one-size-fits-all proposition.

Superannuation is, by definition, a long-term savings plan but that doesn’t mean you should just set and forget. Your strategy when you’re in your 50s and 60s will be very different from when you joined your first superannuation fund. This means that it’s important to review not only your fund performance on a regular basis, but also your investment mix; understanding the way in which it delivers returns and whether it fits your individual needs and retirement goals.

Your four investment types:*Growth – 85 per cent in shares and property, with the aim for a high return.

Balanced – 75 per cent is invested in property and shares for higher returns, with the remaining 25 per cent invested in fixed interest and cash.

Conservative – 30 per cent is invested in shares and property and the remainder in fixed interest and cash, and typically delivers a lower level of return.

Cash – 100 per cent is invested in deposits with Australian deposit-taking institutions or a capital-guaranteed life insurance policy, with the aim to ensure your capital remains guaranteed and earnings are not reduced due to losses on this investment.* The terms used and percentages invested can vary, so check with your superannuation fund for its terms and conditions.

When selecting your investment mix, market volatility is not the only factor to consider. You should also consider how long your super might last, particularly once inflation is taken into account. A financial adviser can help weigh up these factors to ensure you choose the right investment mix for your individual situation.

Depending on your age and stage, and of course your appetite for risk, you may choose throughout the duration of investing in your superannuation fund to change your investment mix. This enables you to match the need for short and long-term goals without leaving your superannuation fund.

If you prefer to be a little more involved with your superannuation but don’t think that a self-managed super fund (SMSF) is something you’re capable of taking on board, then some superannuation funds enable you to get more involved. One such investment option is AustralianSuper’s Member Direct, which gives you access to an easy-to-use online platform where you can invest in stocks in the S&P/ASX 300 Index, Exchange Traded Funds (ETFs) and term deposits.

Of course, it’s also important to remember your goals once you decide to start accessing your super. After years of saving it may be tempting to opt for a lump sum withdrawal but you should consider how this will meet your needs in the long term. You may be better to opt for a product that delivers a regular income to supplement a government Age Pension.

To learn more about making the most of your retirement savings, visit australiansuper.com.au

This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788. The views expressed are those of YourLifeChoices and not necessarily the views of AustralianSuper. The article contains general information and you should consider if it is right for you.

YourLifeChoices Retirement Update March 2016 9

Find out when to check the changes to the Age Pension threshold, and why you should do so even if you think you won’t qualify.

Pitfalls of missing Age Pension changes

Making an Age Pension claim can be a long and arduous process, so the last thing you want is to be sent a letter from Centrelink

advising that you won’t receive an Age Pension because your income or the value of your assets is too high.

If this happens, it’s easy to understand the frustration and the temptation to simply dismiss ever being able to receive an Age Pension. This is a huge mistake.

In the first instance, you should check why your claim has been rejected. It could just be that you entered some information incorrectly or didn’t fully understand what you were being asked to provide. You can then ask Centrelink to review your application, which is advisable.

If you’ve been unlucky enough to miss out on an Age Pension due to exceeding the income or asset thresholds by just a small amount, then it’s important not to assume you’ll never qualify for an Age Pension. Just as your financial situation can change – e.g. you may find yourself with less income or fewer assets – the thresholds used to determine eligibility are subject to indexation and can also change. This means that at some point in the future, you may actually meet the criteria to enable you to receive an Age Pension.

The indexation of thresholds for full Age Pensions happens once a year, on 1 July. Those for a part Age Pension are indexed three times a year – 20 March, 1 July and 20 September. So if you’ve previously just missed out, it pays to check the income and asset thresholds on these dates.

It’s worth noting that even if your Age Pension payment amounts to only a few dollars, you will receive a Pensioner Concession Card (PCC). Holders of a PCC can accesses a wide range of discounts on prescription medicines, medical services, government concessions, such as rates and registration costs, and utility reductions in utility bills. So if you think it’s not worth the hassle of reapplying, think again.

Of course, one of the biggest changes to the Age Pension will take place on 1 January 2017, when the asset thresholds will alter considerably. The taper rate that is applied to assets over the full Age Pension threshold will also double from $1.50 to $3.00. This could result in those on a part Age Pension receiving a greater pension payment or even a full Age Pension. However, it will mean that some part Age Pension recipients will lose their pension payment altogether.

pensions

The reason Australians are living longer is because of what we’ve done over the past 200 years. Growing scientific knowledge has

underpinned improvements to living conditions (e.g. sewers, clean water and safe transport) and medicine (antibiotics, other pharmaceuticals, x-rays, etc.).

These changes have more than doubled the average lifespan at birth from around 35 at colonisation to 82 years. We know evolution has played little, if any, part in this: it doesn’t work that fast. Besides, evolution was only ‘interested’ in protecting successful genes through survival of offspring to maturity – around the time we reached our 30s.

If communities can influence their longevity, individuals can do the same. In the 1980s, research began to identify what was associated with people living longer. Studies take about 20 years to determine which group members survive and why. Publications from the early 2000s revealed expected and unexpected factors associated with longevity. We can group these loosely into five categories: surroundings, health, attitude, parents and eating (SHAPE).

The next step was to help a person understand by how much they might be different from the average and why. Through growing longevity awareness, people can be better informed about how their longevity may evolve and what they can do about it.

One way to do this is by using the SHAPE Analyser, a free tool. In 2008, I developed this service because efforts to plan finances and other matters rely on an

assumption about each person’s time frame. Fewer than 25 per cent of 65 year olds live to within three years of the national average lifespan for their age. Worse, we know the ‘official’ averages underestimate the likely outcome between ages 60 and 80 – just when people want to manage their finances as well as possible and make other important decisions.

As we live longer, we can reasonably expect to live to a slightly greater age, called the survival bonus.

Just as we review our investments and strategies at regular intervals, we can now review our expected longevity to decide for how long we will need to

plan. By knowing what we assume (just like inflation and investment-return assumptions) and using best practice for managing our longevity, we are more likely to stay in some sort of control. We can’t ‘predict’ this accurately but we can make the most of

what we know and are learning about longevity.

It’s also good to know that the factors that support increasing longevity are very similar to what underpins our quality of life. We are usually more concerned about quality than length of life, so being more aware of longevity will contribute to a better life, which may turn out to be longer as well!

The table below gives a brief idea of your longevity, depending on your age. The data is from an Australian study published in 2012, and is specific to men. Women typically have two more disability-free years at age 65, and two more dependent years. Both numbers drop to one year by age 75, with little difference by 85.

David Williams, the founder of the SHAPE Analyser, shares how to measure your longevity, and how it shapes your retirement.

How long will you live?

Understand why you might have a different lifespan

from the average.

Agenow

Disability-freeyears

Years with some

disability

Dependent years*

Totallongevity

Age at death

65 8 7 4 19 84

75 4 5 3 12 87

85 1 2 3 6 91

*Dependent years are defined as those with severe core activity limitations. Core activities consist of self-care, mobility and communication.

YourLifeChoices Retirement Update March 201610

YourLifeChoices Retirement Update March 2016 11

This data shows that on average most of our remaining years will be independent but disabilities increase. Even those who reach age 85 can on average expect another few years before becoming dependent.

The numbers also support the view that ‘the longer you live, the longer you’re likely to live’. At 65, the average lifespan is 84. For those surviving to 75, this increases to 87. For 85 year olds, the expectation is 91.

There are limitations on such numbers – they are averages. As we age, personal abilities and conditions vary more widely between people. As medical and social responses to ageing improve, life expectancies will change. Some good news is that as we age, there tend to be fewer dependent years.

This information is more optimistic than many might expect. However, an increasingly older population will cost more to service.

What can we do about that? The more we know and take personal action to maintain our health and keep contributing, the lower the personal and community costs.

Firstly, try to understand why you might have a different lifespan from the average. Your SHAPE Analyser results will help you with this.

Next, talk with your doctor to understand how any current disabilities might evolve and what you can do about them. Share what you can learn about family tendencies towards disabilities that might affect you – such as vision, hearing, mobility and mental acuity.

Finally, calculate how much money you will need in retirement and work out a plan to meet your needs.

While there are no guarantees, having some sense of what might lie ahead helps with your decisions in seeking to manage things better.

David Williams is CEO of My Longevity, which he founded in 2007 to enable people to understand more about their own longevity. David is an in-demand speaker, writer and adviser on personal and community longevity issues.

When saving for retirement, it’s all about ‘tomorrow’ and trying to ensure that you’ll have enough money to see you through

the years you will spend on a fixed or limited income.

While investing for the long term and not blowing all your cash too soon is important to help you achieve your lifestyle requirements, it’s also important to understand that restrictions, penalties and/or delays may apply under certain circumstances when withdrawing funds from some fixed or long-term investments. This can mean that you are left high and dry without the means to cover everyday expenses and unforeseen emergencies, so it’s important to hold enough funds at hand to cover the unexpected.

It’s difficult to determine just how much money you will need to access at any given time, but as a rule of thumb, putting aside 10 per cent of your outgoings each month is a good place to start. Within just a few months, you should have enough set aside to cover most reasonable bills you may encounter.

While you don’t want to put this money into an interest-earning account that doesn’t grant easy or fee-free access, you can still make it work for you. If you have a mortgage or personal loan, ask your provider if you can open an offset account, or if your product has a free redraw facility without limit restrictions, simply deposit it there and use when required.

If these options aren’t available, you should open a separate, low- or no-fee account in which to deposit your savings. Don’t have it sitting in your everyday transaction account where it can be easily accessed; instead ask your bank if it has a passbook account, or one where you can only withdraw money from a teller. And if this isn’t possible, the old trick of putting your card out of reach (as suggested in Kaye Fallick’s article on page four).

Another way to build up some ‘rainy day’ cash is by setting yourself the 52-week saving challenge. The idea is simple: week one you pop $1 in a jar; week

two, $2; week three, $3; and so on. By the end of the 52 weeks, assuming you don’t make a ‘withdrawal’, you will have $1378 at your disposal. Of course, in the later weeks it may be difficult to stretch to putting aside, say, $40 or $45, but if you can keep

Do you need some tips to put extra money aside? Our very own Debbie McTaggart reveals some tried-and-tested methods to add more dollars to your bank account.

How to save money for a ‘rainy’ day

Build up some ‘rainy day’ cash by setting yourself the 52-week saving challenge.

YourLifeChoices Retirement Update March 201612

YourLifeChoices Retirement Update March 2016 13

it going for as long as possible and then start again, you’ll be surprised how quickly your ‘pot of gold’ accumulates.

An increase in the Age Pension, or salary increase if you’re still working, may not seem like much on a weekly or fortnightly basis, and if you’ve managed to get by without it, there’s no real need to spend this extra amount just because you have it. If you can afford to, set aside any additional money you receive in payments and watch how it grows. The last fortnightly increase in September 2015 amounted to only $6.80 for those on a full Age Pension – a mere pittance. If you had saved this fortnightly increase since then, you would have accumulated $95.20. While by no means a fortune, it could still help in times of need.

Even if putting extra money away is a struggle, you should always try to manage your money so that quarterly or annual bills don’t knock the stuffing out of your budget. Many everyday transaction

accounts will allow you to have subaccounts, which you can use for vehicle registration, council rates, utility bills, etc. All you have to do is calculate how much you need to put away each week or month to cover these bills and section your income into the corresponding account.

As prudent as it is to ensure you have some money available for emergencies, it’s also important to have the funds that are invested earning as much as they can. Interest rates are historically low at the moment, so money in the bank is seeing very little return. If you have a term deposit, or an online savings account, do a little research to see if you’re getting the best rate and don’t be afraid to contact your bank to ask if you can get a better deal.

And, finally, before you agree to any investment, be it short or long term, make sure it meets your needs and that, should you really need to access your money, you can do so without waiting too long or losing too much in fees.

YourLifeChoices Retirement Update March 201614

Ask a room full of people if they are confident in their ability to handle money, and the answer may well be yes. Unfortunately,

rather than proving their skills, the answer may be an indication that they simply don't know what they don't know. The main problem is that when deciding where to place their money, few investors take risk and return into account. This is a sad state of affairs, because the two are irrevocably entwined, and an understanding of them is fundamental if you are going to be money smart.

First, understand that it is impossible to find a risk-free strategy. If you leave your money in the bank, you could suffer low returns with the very strong chance that you’ll live longer than your money, as every year its purchasing power will be diminished by inflation. Yet, if you put it in growth assets, such as property and shares, you leave yourself open to capital losses if you make the wrong choices or try to redeem when the market is down. It pays to remember the adage, ‘whenever there is a chance of capital gain, there is a chance of capital loss’.

You might have heard the old saying, ‘the higher the return, the higher the risk’, and you probably understand that higher returns mean you increase the chance of losing your nest egg. True. The people who invested their life savings in companies such as Westpoint and Estate Mortgage are proof of that, but to make it more confusing, here’s another saying: ‘the higher the risk, the higher the return’. No, it’s not a misquoting of the original saying, it’s

just as true, but refers to a different kind of risk.

In investment jargon the word ‘risk’ means the degree of volatility of market movement that is associated with an investment. To put it simply, the more the value of an

asset fluctuates, the riskier it is said to be. By this definition, cash is a ‘riskless’ asset because $1000 in the bank today should still be $1000 tomorrow, even if the property and share markets tumble. In contrast, you can be certain that the value of your share-based investments will vary from day to day, but, provided they are well chosen, you will achieve better returns over the long haul to compensate you for the increased risk or volatility.

Noel Whittaker illustrates how not knowing the risk–reward trade-off of your investments affects your financial security.

The dangers of not understanding investment risks

First, understand that it is impossible to find a

risk-free strategy.

YourLifeChoices Retirement Update March 2016 15

A geared share trust is a great example. You will get higher returns than the market with a geared share fund because the internal gearing magnifies the gains – the downside is that you will suffer higher losses when the market falls, as they are magnified too. This makes geared funds a good investment for younger investors who have a long time frame in mind, and a mindset that can handle the roller coaster ride these funds can give.

The lesson in all this is that time is the crucial element when considering where to invest those hard-earned dollars. If you believe you will need to withdraw the money in less than three years, you should stick with safe interest-bearing accounts, such as those offered online by the major banking institutions. They give certainty and no chance of loss.

However, if you are in it for the longer haul, you need to understand the risk–reward concept, because there is no doubt that ‘risky’

investments, such as quality shares, will

give the best returns over time.

Think about Jack and Jill who are aged 40 and

are saving for their retirement. They decide they will need an income of $40,000 a year in today’s dollars. Jack is an inexperienced and very cautious investor, and is so risk averse that even on optimistic forecasts, his superannuation will earn six per cent per annum both before and after retirement. Jill understands the risk–return trade-off, and chooses a portfolio that is heavily weighted towards shares – her expected return is nine per cent per annum.

If inflation averages three per cent per annum, Jack will need to accumulate $1.49 million at age 65. This will require monthly contributions of $2147 to superannuation, which is probably well above his capabilities. Because Jill’s investment strategy will provide a higher return, she needs to accumulate only $1.114 million, and has to invest just $994 a month to get there.

This is a graphic illustration of the importance of understanding the risk–return trade-off. As Jill is prepared to accept greater volatility, she has to contribute far less to her superannuation during her working life – consequently, she has more money to spend out of each pay, while at the same time knowing her future is secure.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.

YourLifeChoices Retirement Update March 201616

While many focus on the financial aspects of retirement, Jo Lamble believes that it’s just as important to pay heed to your emotional and mental health. She explains why.

How to prepare emotionally for retirement

Retirement might be looming large or it may be quite a few years away, but many of us have given some thought to preparing for

when the day comes. Most preparation is in the form of financial management, but there’s more to consider than whether or not you have enough money on which to live in your later years.

It can actually be dangerous to ignore the emotional aspects of retirement. Our future happiness relies on a retirement plan that takes into account both our financial and mental health. So, how do you prepare emotionally for retirement?

First, one needs to be careful of state-dependent decision-making, which refers to the phenomenon of making a decision in one frame of mind and potentially thinking differently in another. In other words, the choices we make pre-retirement may not be the same choices we would make post-retirement. Selling your home and buying a cottage up the coast may be an attractive option when you’re working 40 hours a week, but after you finish work, do you really want to be miles away from friends and family? It’s therefore important to leave some decisions until you have actually retired.

Another point to note is that we are generally happier in our later years if we live near friends and have a strong support base – as isolation increases the risk of anxiety and depression. Interestingly, it has been suggested that living near friends can be more important to our general wellbeing than

living near relatives. If your adult children and grandchildren have moved away, there can be the temptation to move closer to them after you retire. But such a huge decision needs careful consideration. Will your children and grandchildren be an adequate replacement to the friends and interests you might leave behind?

Speaking of grandchildren, retirement can signal to your adult children that a free babysitter has become available. You might be delighted to spend endless days looking after the grandkids and then everyone’s a winner. But if you don’t want to commit to certain days or every school holiday, it’s vital that you speak up. Be careful not to set a precedent that can be hard to break.

Lastly, many retirees can mourn the loss of their work life. Whereas they once felt useful and stimulated, they can feel lost and without purpose once they retire. If your self-worth is closely linked to your career, start thinking of other ways to remain stimulated and useful, such as volunteering, casual jobs, social groups and taking up new interests. Again, don’t make any commitments until you have actually retired, but give some thought to what you’d like to explore when the time comes.

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Indexation of the Age Pension rates may see some people with a few more dollars, while grandparents need to register to continue receiving the Family Tax Benefit.

Government and pension update

New pension ratesThe biannual indexation of pension payment rates occurred on 20 March 2016 and has resulted in an increase of $6.90 per fortnight for a full, single Age Pension and $5.20 for each member of a couple.

For full details of the new payment rates, visit YourLifeChoices.com.au

Income and asset indexation Indexation of disqualifying asset and income limits for part Age Pensions took effect from 20 March 2016 and may mean that those who have narrowly missed out on a part Age Pension will now qualify. For a single part Age Pension, the disqualifying income limit is now $1909.80 (fortnightly) and the disqualifying asset limit is $788,250 for homeowners.

For full details of indexed limits, visit YourLifeChoices.com.au

Assistance for overdrawn bank accountsEvery now and again it’s easy to overdraw your bank account, but paying it back often causes financial difficulty. In order to make it easier to manage your money, an agreement has been reached between the banking sector and the Department of Human Services whereby only 10 per cent of your protected payment can be used to repay any overdrawn funds. This Code of Operation (the Code) means

that 90 per cent of your protected payment must be available to you to meet daily living expenses.

For more details on the Code, visit Humanservices.gov.au

Are you caring for your grandchild?To ensure your Family Tax Benefit Part B continues to be paid, you must register with Centrelink as a grandparent caring for a grandchild before 1 July 2016. There will be no changes to your payment as long as you register before this date.

For more details about the Family Tax Benefit Part B, visit Humanservices.gov.au

Medicare benefits cheques to endIf you currently receive your Medicare benefits by cheque, you will need to advise Medicare of your bank account details to ensure your payments continue. From 1 July 2016, Medicare will no longer issue cheques to pay rebates; instead, the money will be paid directly into your bank account. If you have not registered your account details with Medicare, you should do so as soon as possible to ensure you receive any rebates due. Rebates are usually paid into bank accounts the day after a claim is submitted, either online, in person at a Medicare office or at the point of service.

Find out how to register your account details at Humanservices.gov.au

YOUR RETIREMENT lIVING COSTS

December quarter costsIn March, the Association of Super Funds of Australia (ASFA) released the ASFA Retirement Standard. ASFA has kindly allowed YourLifeChoices to share this information.

Expenditure items Comfortable couple

Modest couple

Comfortable single female

Modest single female

Building and contents insurance 31.90 25.25 26.58 25.35Rates 37.46 31.90 31.90 32.02

Home improvements 10.63 0.00 10.63 0.00Repairs and maintenance 18.61 13.29 15.94 16.01

Total housing 98.59 70.44 85.05 73.38

Electricity and gas 56.48 54.51 41.65 41.01Total energy 56.48 54.51 41.65 41.01

Food – groceries and other fresh food 199.09 160.38 110.60 77.42Total food 199.09 160.38 110.60 77.42

Bundle of home phone, broadband, mobile 30.56 15.29 24.01 8.74Total communications 30.56 15.29 24.01 8.74

Household cleaning and other supplies 26.07 15.64 18.77 10.43Cosmetic and personal care items 3.11 2.99 6.99 2.00

Barber or hairdresser 20.86 8.99 14.99 5.02Music and CDs 2.18 0.00 0.32 0.00

Newspapers and magazines 8.35 1.94 8.16 2.44Computer, printer, software 4.28 4.28 4.28 4.28

Household appliances 11.97 3.03 10.20 3.03Pest control, alarm service 12.81 0.00 12.81 0.00

Total household goods and services 89.63 36.88 76.51 27.20

Clothing 57.72 28.86 38.48 17.78Total clothing and footwear 57.72 28.86 38.48 17.78

Car transport and running costs 135.40 89.99 135.40 89.99Public transport 5.25 5.25 2.62 2.62Total transport 140.64 95.24 138.02 92.62

Health insurance 82.04 65.79 41.74 32.90Chemist 24.12 3.29 13.31 1.85

Co-payment and out of pocket 42.33 12.76 29.09 7.66Total health services 148.49 81.84 84.13 42.41

Membership clubs 9.90 1.98 4.97 0.99TV, DVD, digital camera 1.83 0.92 1.83 0.92

Alcohol consumed in home (or equivalent spent) 41.34 15.50 25.84 10.34Lunches and dinners out 82.68 25.73 61.77 30.89

Cinema, plays, sport and day trips 13.86 19.31 6.92 5.94Domestic vacations 79.21 37.62 67.32 18.81Overseas vacations 55.43 0.00 37.62 0.00

Sundry items 30.57 11.88 23.45 7.92Total leisure 314.82 112.94 229.73 75.81

Gifts and/or alcohol or tobacco 0.00 0.00 0.00 0.00

Total weekly expenditure $1,136.02 $656.38 $828.19 $456.39Total annual expenditure $59,236 $34,226 $43,184 $23,797

Weekly expenditure for retirees aged 65–85 IncreasedNo change Decreased

YourLifeChoices Retirement Update March 201618

Expenditure items Weekly Monthly Annual

Building and contents insuranceRates

Home improvementsRepairs and maintenance

Total housing

Electricity and gasTotal energy

Food – groceries and other fresh foodTotal food

Bundle of home phone, broadband, mobileTotal communications

Household cleaning and other suppliesCosmetic and personal care items

Barber or hairdresserMusic and CDs

Newspapers and magazinesComputer, printer, software

Household appliancesPest control, alarm service

Total household goods and services

ClothingTotal clothing and footwear

Car transport and running costsPublic transportTotal transport

Health insuranceChemist

Co-payment and out of pocketTotal health services

Membership clubsTV, DVD, digital camera

Alcohol consumed in home (or equivalent spent)

Lunches and dinners outCinema, plays, sport and day trips

Domestic vacationsOverseas vacations

Sundry itemsTotal leisure

Gifts and/or alcohol or tobacco

Total expenditure

How does your spending compare?

YOUR RETIREMENT BUDGET

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YourLifeChoices Retirement Update March 201620

ResourcesHandy calculatorsIf you want to know how much income your superannuation will provide or how you can top up this income with an Age Pension, visit AustralianSuper.com.au

Monitor your retirement spendingTo find out how reducing your spending can increase your retirement savings, visit Superguru.com.au

Avoid making retirement mistakesDon’t fall into the same trap as others; find out which are the seven most common retirement mistakes at YourLifeChoices.com.au

Age PensionTo confirm your individual circumstances and whether you are eligible for an Age Pension, contact the Department of Human Services

Your longevityTo calculate how long you can expect to live in retirement (no guarantees), visit Mylongevity.com.au

Standard of livingTo find out more about how the Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard is calculated, visit Superannuation.asn.au

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IMPORTANT DISCLAIMERNo person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor.Copyright Indigo Arch Pty Ltd 2016