April 24, 2011

AUSTRALIA: How much is enough to retire on?

SYDNEY, NSW / The Sydney Morning Herald / Money / April 24, 2011

By George Cochrane

Financial writers indicate that to achieve a ''comfortable lifestyle'', retirees should aim for an annual income amounting to 60 to 70 per cent of their final salary. The question is: does the ''final salary'' refer to the gross or net pay? Is there a happy medium or a rule of thumb about the multiple to be applied to expected expenditure to establish the value of assets required to achieve this ''comfortable lifestyle'' figure? M.B.

I don't know if there is a rule of thumb but I always use net (after-tax or ''cash in hand'') income and suggest that it would be ideal to retire on 75 per cent or more of this. In other words, if the family is receiving an annual after-tax income of $100,000 while working, then an after-tax retirement income of $75,000 would be appropriate.

As an aside, a couple retiring when both reach 65 will need about $1.2 million in super to provide a tax-free pension beginning at $75,000 a year (indexed at 2 per cent annually to partially keep up with inflation) in order to last the wife's 22 years average life expectancy. And that assumes that they will sell their house to pay for entry into an aged-care facility.

If, instead, one becomes ill before the other and needs to enter a nursing home, it can throw the family's budget into turmoil. Don't underestimate how much one needs in retirement.

Low-tax investments

I am a 67-year-old pensioner with a pensioner husband who is 70. We wish to downsize and enter an over-50s resort. When our present house is sold for about $1.2 million, we will be left with an approximate sum of $600,000 after buying a smaller home in the resort. At present, I receive a part-pension and I have a portfolio of shares in a retirement income plan to the value of $80,000. From this, I choose to take the minimum allocated pension each year. We do not earn enough on a yearly basis to pay tax. What is the best way to invest the $600,000 without having to pay a lot of tax? Would it be advisable to add it to my existing retirement plan? C.S.

Your current allocated pension is paid out of a superannuation pension fund and you cannot contribute into super after the age of 65 without meeting a ''work test''; that is, you need to have worked 40 hours within 30 days during the financial year.

If you choose to meet the work test, you can contribute up to $150,000 each financial year into a super-accumulation fund without this being taxed on entry into the fund, officially known as a ''non-concessional contribution''. Otherwise, you should plan to invest the money outside super with an emphasis on security and income.

One option is to place, say, $100,000 in solid blue-chip shares paying healthy franked dividends, such as the big banks and a couple of others, with the remainder going into bank term deposits.

You must own more investments than your allocated pension, otherwise you would be getting the full age pension and the additional $600,000 you will be left with after the sale of your house may therefore exclude you from the age pension. I think it would be worth seeking professional advice.

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