Retired Investors (Age 65+) - What Should They Consider?
For many people, retirement age is 65. By now, you may already have retired or may be considering retirement over the next few years. Below are some key financial planning points to discuss with your financial adviser:
Funding your retirement – if you have retired and no longer earning a salary or business income, you should consider using your superannuation balance to fund your retirement. Once you have reached 65, there is no restriction if you wish to withdraw lump sum amounts for use.
You may also start an account-based pension by drawing from the assets of your superannuation fund. In general, a tax free pension can be drawn from age 60 and any income or gains derived from superannuation assets used to commence the pension is not taxable. However, there is a limit on the amount of superannuation balance you can use to commence a pension, which is currently $1.7m. In order to maintain tax concessions, a minimum pension payment is required to be made annually and this amount is dependent on your age at the start of each financial year. For example, the minimum pension payment at age 65 is 5% of the pension balance at the start of the relevant financial year. However, since the COVID-19 pandemic, the Australian Government has halved the minimum pension payment up to and including the financial year ending 30 June 2023.
Just because you are retired does not mean you can no longer make superannuation contributions but you need to consider whether it is still tax effective to do so. If your marginal tax rate has fallen because you are no longer earning an active income then the tax effectiveness of making superannuation contributions and investing via superannuation may diminish. Assuming it is still attractive to use superannuation as an investment vehicle, you can only make superannuation contributions if certain eligibility criteria is satisfied. Your adviser should be able to guide you through the requirements.
Investments – apart from the various investment risks that should always be considered, there are two risks that are particularly important for this age group:
Sequencing Risk – this is the risk where the order and timing of investment returns are unfavourable, resulting in less funds being available at the actual time of need. For instance, if a substantial investment loss is realised close to retirement or in the early years of retirement, it could result in your savings running out during your retirement because your asset pool and potential income and gains from that asset pool has been depleted.
Longevity Risk – this is the risk of outliving your retirement savings. This could be the outcome of an investment portfolio that is too conservative (i.e. having too high an investment allocation to defensive assets such as cash and bonds and not enough in growth assets such as shares and real property). Such a portfolio may not generate enough income or capital growth to keep pace with inflation or to fund your desired retirement lifestyle.
These risks are critical for retirees because there is no employment income which can be used to top up investments in a down market or to fund living expenses. Making sure your investment portfolio is regularly reviewed and is in good shape at different stages of your life is the best way to manage these risks. Rest assured, there are a variety of strategies that pre-retirees and retirees can adopt to minimise these risks – you should discuss these with your financial adviser well before your retirement.
Estate planning – an estate plan should already be in place. However, now is also a good time to make any revisions if necessary.
GENERAL ADVICE WARNING: The above is general advice only and does not take into account your personal circumstances or objectives. You should seek your own independent financial and tax advice to ascertain whether and how the above applies to your particular situation and whether it is likely to meet your objectives, prior to making any financial and investment decisions.