Someone born today is likely to live to 84, with life expectancy predicted to jump to 90 by 2050 and rising, according to research from the University of Melbourne. At the same time, medical advances mean we’re fitter and healthier much later in life and many of us are working well into our seventies and beyond.
This has consequences for retirement planning and it’s certainly not as simple as extending an existing plan for 10 years or more. A new approach to wealth management is sensible given super rules are changing to reflect our longer lives, with super funds now allowed to accept contributions from people in the workforce up to age 75.
Accordingly, the way many clients contribute to super, take advantage of government incentives and view risk needs to be reconsidered.
Let’s take a hypothetical example of a couple who are 55 now with a paid off $1 million house with $500,000 each in super with income protection and life insurance inside the fund, as well as a $100,000 and $50,000 annual salary. They were going to retire at 65 but now they are going to retire at 80. How does their financial planning strategy need to change?
Omura Wealth Advisors wealth management director Terry Vogiatzis suggests the couple use their surplus income to prioritise making tax deductible, concessional contributions into the higher earning spouse’s super fund to get a higher value of tax deduction.
“Any excess savings could go towards concessional contributions for the lower earning spouse’s super,” Vogiatzis says.
Paramount Financial Solutions director Wayne Leggett says if the couple has limited spare income to fund these contributions, they may need to trim any discretionary expenditure, at least until they reach preservation age, to help bump up their super balance.
“Once they are 60, they can start a transition-to-retirement strategy and use this for the remainder of their working lives,” Leggett says.
Leggett says with a longer investment horizon, the couple might now have a higher risk capacity. This may influence how they invest inside super, although this should only be one element of their risk profile.
Vogiatzis says if no income is required at 65 years old, the couple could start an account-based pension to lower the tax rate inside their super fund from 15 per cent to zero and re-contribute excess pension payments back into super.
While the decision to keep income protection and life insurance depends on the policy’s terms and the couple’s health, they could likely self-insure and cancel their policies when they turn 60.
At this age, 60, their combined super balances will likely be between $1.3 million and $1.5 million, which could support living costs of between $65,000 and $80,000 a year.
“Leading up to age 65, I would move their income protection ownership to their personal names rather than have it in their super funds so that they can claim a tax deduction on those premiums, worth 32 per cent, rather than their super funds claiming a tax deduction, worth 15 per cent. They should also amend their benefit period to five years to save on premiums rather than age 65,” Vogiatzis says.
Leggett says it would make sense for the couple to review how their super funds are set up, to ensure the funds are invested to maximise returns and that the fees are reasonable.
“Once they reach 65, the funds held in a pension account would no longer be subject to tax, which would boost the growth of their wealth from that point forward. With a bit of budget-trimming and prudent planning, they may find they have enough accumulated to retire earlier than 80,” Leggett says.
