Planning A Nest Egg
Newcastle Herald
Monday April 5, 2004
ASK anybody how long they would like to live and it's odds-on that the answer will be for as long as they're healthy and then just die quietly in their sleep.
Unfortunately it is not as simple as that and, while it is well known that the average person is living longer than ever, the reality remains that none of us know when we will die or what will be the state of our health before our death.
Given this irrefutable piece of logic, how on earth does anybody work out how much money they will need for a comfortable retirement?
The simple answer is that you can't. Apart from the state of your health and how long you will live, the size of the ideal portfolio will depend on a myriad of other factors that include the performance of investment markets, the rate of inflation, how much you are likely to receive in bequests from relatives and how much you are likely to hand out due to requests from children.
Regrettably, most Australians are not prepared to face the thorny question of retirement planning and, according to the latest report from AMP-NATSEM, the average superannuation balance of employees aged between 50 and 54 is only $103,000, hardly enough to provide a decent living for the family dog.
The survey concludes that far too many Australians are looking at retirement through rose-coloured glasses. They won't have enough superannuation to provide them with the life they expect in retirement and must now accept that they need to work longer, save more and reduce major debt before they will be ready to settle back and enjoy the good life.
The solution is to take stock of your present situation and then set some specific goals. Probably the best way to start is to visit a financial adviser who will start the process by asking you to complete a Fact Finder form in which you will list details of your assets, liabilities, income and expenses.
You will also need to state your financial goals and confirm that you have a valid will and have appointed an attorney to act on your behalf.
The adviser will use this information to help you design a strategy for a comfortable retirement.
Most advisers will give you a free initial consultation so you can get acquainted with them and so you can both decide if you want to form a relationship.
They should then discuss additional fees, and these may range from around $500 to $1000 if they need to prepare a detailed statement of advice that may run to 60 pages or more. The statement of advice is required to list all upfront and ongoing fees, so take the time to study it carefully.
The following hypothetical case study will help you understand how the process works.
CASE STUDY
George and Kath are both aged 45. He earns $75,000 a year in a secure job and she earns $5000 a year from some casual work. They have a home worth $700,000 with a mortgage of $200,000. His superannuation is worth $80,000. They hope to retire at age 60 with an income of $48,000 a year in today's dollars. Like many couples in this position, they live for the moment and have racked up about $5000 on credit cards.
Their children have left home but they still seem to spend all their income after making the loan repayments.
The parents of both George and Kath are pensioners and they don't have much apart from their homes. The couple don't wish to rely on money from this source as there are several siblings and there may not be much left over if the parents have to sell up and move to a retirement village.
The adviser enters this data into a software program using the assumptions that the couple will live to age 85 and that the net return on their investments will be 7 per cent and that inflation will be 2 per cent. The computer calculates the couple will need to accumulate $940,000 to achieve their goal.
Now that the specific goal has been determined, the next step is to formulate the strategy. If George's salary increases by 4 per cent per annum and the employer contribution stays at 9 per cent, it will be worth $450,000 at age 60. This leaves the couple almost $500,000 short.
It's a breathtaking number but the first step in solving a problem is to recognise it. The quickest way to accumulate wealth is to start a borrowing program, and the adviser recommends they borrow $200,000 by way of a home equity loan to invest in quality share trusts.
The loan would be on an interest-only basis with tax- deductible payments of $13,000 a year. If the trust returned 7 per cent a year (income and growth), it would be worth $570,000 when George and Kath decide to retire.
Naturally they want to be debt- free at retirement so a further recommendation could be made that Kath invest $630 a month into superannuation, which will provide an extra $200,000 that can be withdrawn to pay off the loan at age 60.
Obviously this is only one of many strategies that could be used, but the main point is that by facing up to the challenge, the couple could work out a way to achieve a happy and prosperous retirement. The quicker you face up to a problem, the easier it is to solve.
© 2004 Newcastle Herald