Money Australia – July 2017

MONEYMONEY JULY 2017 JULY 2017 2727

B

ill and Lynn receive combined gov-

ernment pensions of $21,840 a

year. They want an annual retirement

income of $52,000, meaning Bill’s part-

time work needs to contribute $30,160.

If Bill stops working it is likely that they

would receive a combined annual pen-

sion of $34,000. They would then

require $18,000 a year from their capital

(representing an annual drawdown of

6%). However, a conservative portfolio

is unlikely to achieve this level of return,

so Bill and Lynn may need to reduce

their expectations.

If they wish to preserve the capital,

they would need an annual investment

return of 7%-8% to also cover inflation.

This means having a diversified portfolio

with some allocation to growth assets,

such as Australian and international

equities and property. These have great-

er return potential but

are also more volatile,

so Bill and Lynn may

need to take on more

risk than they would

have liked.

The good news is that

a large part of the return

on Australian equities is

from dividend income,

which for large Australi-

an stocks tends to be

less volatile than share

prices. For instance, the

ASX 200 shares index

currently provides an

annual dividend yield of

4.02%, which is 80%

franked (tax paid) to

provide a total yield of

5.4%. The franking

credits received on this

income represent a

credit for the tax already

paid, and are refunded

to investors where their tax rate is below

the 30% company tax rate.

A big concern for Bill and Lynn is the

volatility associated with investing their

savings. Strategies that could be used

to minimise volatility include:

• A “bucket” system where a number
  of years of income are locked away in
  cash and term deposits to ensure that
  payments continue uninterrupted if mar-
  kets fall. For example, keeping just over
  $100,000 in secure assets would repre-
  sent six years of income payments at
  $18,000 a year. If markets fall, it’s unlike-
  ly growth assets would need to be sold
  down to fund the $18,000 a year for at
  least six years, giving those assets a
  chance to recover.


• Spreading investments across asset
  classes reduces the risk associated with
  any one asset class. For example, an
  exchange traded fund could
  be used to achieve a diversi-
  fied exposure to the Australi-
  an sharemarket.
  They could also consider
  investing some of their sav-
  ings in an annuity, providing
  regular payments in
  exchange for a lump sum
  upfront, but this is unlikely to
  achieve the desired return.
  If Bill and Lynn wish to tar-
  get a 7%-8% return, a diver-
  sified approach should be
  considered. They could con-
  sider having a portfolio with
  an exposure to Australian
  and international equities to
  provide the opportunity for
  yield and capital growth,
  together with an allocation
  to secure assets, which
  could include an annuity
  to provide the guaranteed
  cash flow.

Steve is a financial planner and founder

of Wealth on Track based in Adelaide.

wealthontrack.com.au

Set up a

pension

in super

STEVE GREATREX

‘Bucket’ system

could reduce

the volatility

LINDZI CAPUTO

Lindzi is a financial planner with HLB Mann Judd in

Sydney, specialising in superannuation and personal

wealth management.

F

irst, I think the fee that you have been asked to pay
for financial advice seems on the high side, particu-
larly from a bank planner, though the bank you went to
has a reputation for charging excessive fees. Find an
adviser who has good reviews from clients and who
is well qualified and works nearby.
If you want guaranteed returns you really can only
use a bank with term deposits. Because Bill is working,
he pays some tax now – $2700 last year. So it may be
worth considering moving your money into superannu-
ation and then starting an account-based pension (or
income stream). The latter will have zero tax on the
earnings and zero tax on the payments.
When you do this, you will need a super fund that
offers you bank term deposit rates and pays well on
cash rates. The rate will be low but that is the price for
zero volatility. Avoid anything that sounds like a term
deposit but pays an attractive interest rate (such as a
debenture). Many investors have lost money in these
types of products over the years. Stick with a bank.
Your adviser will be able to work out how much
money you should withdraw through the income
stream, and should also model for you how long the
money might last.
Whether you hold your money in an ordinary bank
account or in the super/income stream environment
won’t make a big difference to your aged/disability pen-
sions. The money will still have a “deeming” rate applied
to it in any event – 1.75% on the first $81,600 and
3.25% above that.
Bill, you earn $32,000 a year from your delivery jobs
and enjoy the work. You receive $400 a week each
from Centrelink and now you are also getting a UK pen-
sion that equates to $88 a week. So you are already
getting your $1000 a week. Your wish is consistent with
the ASFA retirement standard, where a modest retire-
ment for a couple is $670pw while a comfortable retire-
ment is $1153pw. So you’re not being greedy!
Therefore, you should only need to take the minimum
amount from your income stream, which starts for you
at 5%, or $279pw. This money could go into a “holiday
account” – you could use it for your annual break, or
for any emergency spending.
Bill, you will be able to contribute a non-concessional
$100,000 a year into super. So you may need to organ-
ise your contributions over a period of time.

To achieve

a return of

7%-8% they

may need

to take on

more risk