Do older Aussies need to rethink their retirement strategies?

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June 24 2021
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Record-low interest rates, higher-valued stocks and tax implications mean that retirees need to rethink their investment strategies, an industry expert has said.

Do older Aussies need to rethink their retirement strategies?

During a media briefing, HLB Mann Judd informed retirees that the long held 60-40 investment model of risky versus secure assets is no longer viable, with retirees now needing an 80-20 ratio to live comfortably.

HLB’s fund manager, Jonathan Philpot, warned retirees that in an ultra low interest rate environment, refusal to take on additional risk could result in returns of just 2 per cent over the next decade.

“Many retirees wish to preserve their capital throughout retirement, which requires a 5 per cent plus return from super – this indicates you may need to be 100 per cent invested in the sharemarket to achieve this,” Mr Philpot explained.

However, Mr Philpot warned of events such as the COVID-19 pandemic, which saw markets fall by as much as 37 per cent in a number of weeks.

“This is what is called sequencing risk, and if you were to sell down your share position, as you would be strongly considering, then you now lock in this loss that your portfolio will never recover from, and not only is your goal of preserving capital throughout your retirement gone, but most likely you will run out of money in your retirement years,” he warned.

Retirees refusing to spend

A major finding of the Retirement Income Review, released last year, revealed that older Aussies should spend their superannuation instead of preserving it, however, Mr Philpot highlighted that the government’s message is not readily welcome by retirees.

“If you’ve built up [capital] , you’re self-sufficient and you’re not relying on a pension, many of these retirees are now wishing to preserve this capital,” he said.

While highlighting changing rules will make it harder for retirees to preserve large amounts of capital in the superannuation system, Mr Philpot noted that many older Australians still wish to pass on their retirement funds to the next generation.

“In regards to the overall picture of ‘am I happy to wind down my superannuation over my expected lifetime’, for some people they are happy to do that and leaving the kids the Sydney property they have, but for the majority, certainly in our clients’ case, it’s more preserving that balance,” he said.

Changing investment structures

For wealthier Australians looking to pass down their superannuation balances, HLB Mann Judd Sydney wealth management partner Michael Hutton highlighted the importance of alternative structures.

Even after a raft of changes to the superannuation system, wealthier Australians may still need an alternative investment option, Mr Hutton opined.

“While the changes are welcome, superannuation is not without limitation, and some Australians should consider alternative options to complement their superannuation.

“For wealthy retirees in particular, the tight superannuation contribution limits have reduced the level of wealth they can accumulate in super and thus the amount they can draw in retirement,” he said.

Mr Hutton said an investment company can receive a loan from the family, invest the funds, and pay tax on earnings at the company tax rate of 30 per cent. While this is higher than the superannuation rate, it’s lower than the highest personal marginal tax rate.

“Once in retirement, people can draw a pension from their superannuation fund, and any additional funds required can be drawn from their investment company. Because the money has been loaned to the company, the funds drawn out each year can be taken tax-free, and applied against the loan account.

“An investment company is perpetual and makes an ideal investment structure for families looking to build and protect their assets for future generations,” Mr Hutton concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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