How much money do we need to retire? This is one of the questions I'm frequently asked.
There is no simple answer - people's spending habits vary enormously, and a heap of variables, such as how long you will live, and the state of your health, come into play.
Even so, it's worthwhile doing some calculations as a guide for future strategies. So today I will show you how to use the calculators on my website to design your retirement future.
Think about a couple, both aged 62, who wish to retire at 66. They own their home, and their financial assets on retirement should be $500,000 in super, and $80,000 in bank accounts. For Centrelink purposes, their furniture and motor vehicle would be worth $20,000.
Their first step is to do a budget, to get some idea of their living costs now and when they retire. The ASIC website, moneysmart.gov.au, is a fantastic resource that shows how to prepare a budget and also provides useful calculators.
Their present spending needs to be adjusted for retirement, eliminating items like travel to work, bought lunches, work clothes and union fees. Two-car families should also consider whether they could reduce their car costs by only having one car in retirement.
This exercise can be challenging: you have to accept that there are some items for which you can make a reasonable estimate, and others that are at best a good guess, because the final outcome will be known only in retrospect.
After doing the budget our couple decide that $65,000 a year in today's money would give them an adequate retirement income.
Their next step is to go to the future value calculator at www.noelwhittaker.com.au and convert that sum to its value in four years. We'll apply an inflation rate of 2 per cent. The answer is $70,400, which can be rounded down to $70,000.
Next, they need to work out their Centrelink entitlements. Using the deeming calculator on my website, they enter the financial assets, superannuation, and bank accounts, all of which are subject to deeming. The sum of $580,000 produces a deemed income of $434 a fortnight.
Next they go to the Age Pension Calculator, and enter income of $434 and assessable assets of $600,000.
The result will be a pension of $682 a fortnight each under the income test, and $414 each under the assets test. Centrelink uses the test which gives the lowest pension, so they are assets tested and should be eligible for a total fortnightly pension of $828. That's $21,500 a year.
We now have specific data. Their expenses should be $70,000 a year, and the pension will provide $21,500 of that. The shortfall is $48,500 a year.
To complete the exercise, simply go to my retirement lump sum calculator and enter $48,500 as the yearly income needed, using an indexation rate of, say, 1.5 per cent, an earning rate of your choosing and how many years you need your money to last. The calculator will tell you that a lump sum of $690,300 would be necessary to provide an indexed income of $48,500 a year, at an earning rate of 7 per cent a year. This assumes all funds will be exhausted after 25 years.
It's important to understand that these numbers are not cast in stone - and you need to review your situation at least once a year to see if you need to adjust your strategies. Also, many people will receive bequests when their parents pass on, and these numbers should be factored into the calculations. What this planning does is give you a chance to consider whether you need to boost your superannuation by working a little longer, or reduce your planned expenses.
My wish is that this column will enable you to become familiar with all the calculators on my website - they can be your best friend when planning your retirement.
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Noel answers your money questions
I wish to give each of my eight grandchildren 25,000 when they turn 18. What is the most sensible way to do this? Ideally they would plan to use that gift as help to establish a nest egg.
I know that you have answered this question before in your column, however I feel that with the current unusual financial climate your thoughts may have changed.
I have long suggested that insurance bonds are the perfect investment to build up funds for grandchildren because there is nothing to declare on anybody's tax return each year as the earnings accrue as bonuses.
Furthermore, at any stage the bond can be transferred to the child free of capital gains tax. An insurance bond is a tax paid investment with the fund paying tax at 30 per cent on your behalf.
This is why the asset mix is important and why you should take advice about which bond best suit your goals and your risk profile. The current uncertainty does not change any of the above.
When you have a solicitor draw up a will, are you obliged to use them to be the executor of the will upon death? Also, are there standard solicitor fees relating to the execution of a will? Are they ever entitled to take a percentage of the estate as payment?
Brian Herd of CRH Law points out that there are two basic concepts with a will. The first is who will be the executor, the second is how the executor will administer the estate.
The executor will be responsible for administering your estate when you die and this can be anyone aged 18 or over.
It can be a solicitor, but it doesn't have to be. You are not obliged to appoint the solicitor as your executor when you make a will.
In fact, many solicitors would prefer not to be an executor of a will. However, a solicitor is often engaged by the executor to do the work of administering the estate on behalf of the executor.
While there is no obligation to do so, most people act as an executor only once in their life. It can be a complex process, and often best given to an experienced person such as a solicitor.
There are no standard fees charged by a solicitor to be the executor of an estate. However, they are required to be upfront and transparent in relation to how much they will charge in administering the estate.
A solicitor, who is an executor, can charge a commission or a percentage of the value of the estate if there is a clause in the will which permits him or her to do so but even then, they don't have to.
Alternatively, if there is no such clause in the will a solicitor can apply to the court to be paid a commission. This is usually only done where the estate is complex and ongoing.
After working in Australia for 40 years and paying tax since 1968, I retired in 2008 and have been living in Thailand since then with my Thai partner as a self-funded retiree.
Sadly, with the 2008 financial crisis and now the COVID financial crisis, the return from my retirement funds have reduced to the extent that I now require the addition of the Australian Age Pension.
I realise that I have to return to Australia to apply for this pension, however it seems incredibly unfair to make me stay in Australia for two years to retain this pension and be unable to return to my partner and home in Thailand.
I am going on 72 years of age now. Are you aware of any way to avoid this two-year stay in Australia?
Retirement Essentials did some research to understand if there were any loopholes to the legislation, but sadly the news is not good.
The Social Security Laws are very clear on their requirements. (Unfortunately, our laws are not like some other countries) and we don't have a social security agreement with Thailand.
Centrelink and the Social Security websites state that the applicant must meet the Australian Residency rules, be in Australia when they apply and notify Centrelink as soon as they intend to leave for longer than 6 weeks. Centrelink will then determine if the applicant continues to meet the laws and whether they will continue to be paid an age pension.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. firstname.lastname@example.org