It has been a number of months since we updated the website with Scott Francis' articles published in the Eureka report. We have now caught up and welcome you to take a look at these pieces - 17 in total.
A modest lifestyle for a single person will cost $22,539 per annum
A comfortable lifestyle for a single person will cost $41,090 per annum
A modest lifestyle for a couple will cost $32,511 per annum
A comfortable lifestyle for a single person will cost $56,236 per annum
An interesting aspect to consider is the level of increase or inflation in these levels from one year to the next.
The increases for the past year have been:
A modest lifestyle for a single person - 2.65%
A comfortable lifestyle for a single person - 1.68%
A modest lifestyle for a couple - 2.34%
A comfortable lifestyle for a single person - 1.66%
The official Australian Bureau of Statistics data for Consumer Price Inflation (CPI) for the period ending the 30th of September 2012 saw prices increase by 2.0%.
The Retirement Standard data suggests that prices are rising faster than CPI for those living a modest lifestyle whilst those living more comfortably seeing prices rise less.
The ABS data suggests as much with two of the largest rises in prices over the past 12 months being in the area of health and housing (including electiricty & gas).
How to apply this data?
The cost of living in retirement differes from one household to the next but the retirement standard provides a useful benchmark to test your level of planned and real expenditure in retirement.
The other major use is to get a sense of rising costs in retirement and to plan accordingly?
How to plan to protect against inflation in retirement?
Unfortunately the firt major lesson is that investing all of your income producing assets in cash is unlikely to successfully fight inflation through 20 to 40 years of retirement. We all need to build in other asset classes that will help fight inflation. We believe a major component of these assets for Australians are dividending yielding company shares along with carefully structure fixed interest (bond) investments.
If you would like to knowmore about our approach please be in contact.
A lot has been written and served up to us through advertising channels about the benefits of the low cost industry super fund network. At A Clear Direction we think that some industry super funds offer a good option for clients especially with low balance beginning their superannuation savings journey.
However, a major issue I have with the “Big Bucket” investment approach offered by these and other superannuation offerings comes to when you want to start drawing down on the balance to sustain your cost of living and lifestyle in retirement.
By Big Bucket approach I mean whereby you have a range of investment choices which hold a diversified pool of assets and you get to choose one or two of these choices.
The problem comes once you start to draw down. A few years ago you did not have the choice of targeting where to draw your payments from so you were forced into selling down a percentage of all the asset classes held in the fund. This thankfully has improved so now a member could have a cash option and draw all payments from there along with a balanced, moderate or conservative diversified option.
So a suggested structure within these big bucket fund is to have a holding of cash alongside a diversified investment option matching your required asset allocation.
This all sounds pretty reasonable. The problem in the structure is that the investment earnings generated by a particular investment option are not able to be directed back into the cash option to top it up. Rather they get automatically re-invested back into the investment choice from which they were generated. The end result is that you quickly see the cash component dwindle.
So what this means is that a member has to manually sell down assets from the diversified balanced, moderate or conservative option to top up the cash account. What you are doing is selling a range of asset classes. This includes selling down growth style assets such as shares and property.
If those investments have been steadily growing this is not a problem as we would be undertaking effective rebalancing. Unfortunately when growth asset markets are struggling, selling down these assets is locking in the losses or poor performance that has occurred.
Take the past 5 years as an example. We are still well away from seeing shares and listed property assets regaining the levels of late 2007. If we are forced sellers now we are locking those paper losses into real losses.
In my opinion a much more effective arrangement is to take control of where the income generated by assets is invested and in doing so reducing the need to be forced sellers of assets at a point in time.
Another interesting side issue is to know where administrative fees are being taken from in “Big bucket” accounts. Most likely it is across the investments proportionately. Here is another situation when you can become forced sellers when ideally it would be better not to do so.
At A Clear Direction we believe that you can have the benefits of a low cost superannuation service along with the necessary control to make sure you are not forced into making poor investment decisions along the way.
Three new articles written by Scott Francis have been added to the Eureka Report section of the website:
20/06/2012 -PE ratios: A new pathway to asset allocation- Using the PE ratios of different asset classes, we can build expectations of future investment returns from the earnings of different assets. The recent 75 basis point interest rate cuts makes cash a less attractive investment - something that looking at the PE ratios of asset classes shows. 11/05/2012 -Face-off: Shares always win after tax- When it comes to after-tax returns, it's clear that shares outperform bonds over the longer term. 09/05/2012 -Budget 2012: Time for a tax strategy rethink- This year's budget provides a good opportunity to make some subtle changes to your tax strategy.
In his latest Eureka Report article, Buffett's dividend secret , Scott Francis looks at a key characteristic of Australian shares - their ability to outperform inflation through dividend growth.
Even during the tough conditions experienced on the ASX since late 2007, dividends have continued to grow.
In a tough investment climate like this it is very appealing to give up on shares and rather stick your money in cash or even bonds. However history tells us that an exposure to Australian shares will also be helpful in fighting of the impact of inflation over the medium to long term.
I encourage you to take a look at Scott's article,
The latest edition of the ASFA Retirement Standard has been published today - ASFA Retirement Standard September 2011. The details show that the costs of living for singles and couple in retirement continue to rise.
The key annual figures are:
Modest lifestyle for a single - $21,957
Comfortable lifestyle for a single - $31,767
Modest lifestyle for a couple - $40,412
Comfortable lifestyle for a couple - $55,316
These figures show that the rate of inflation over the 12 months to the end of September has been between 2.82% (Modest lifestyle for a couple) and 3.96% (Comfortable lifestyle for a single).
These figures provide a useful guide for those preparing for retirement both in terms of absolute income requirements but also the rate of inflation being experienced by retirees.
I don't think that it comes as any surprise that the cost of living for those in retirement tends to be growing at a faster rate than the Australian Bureau of Statistics inflation gauge - the Consumer Price Index. Over recent periods this gauge has shown that the costs of food and energy (something that retirees spend a large percentage of their income paying) are rising whereas the costs of buying electronics and cars (things that retirees don't tend to spend a lot on) are not rising as much or even falling.
The other potential use of the quarterly report is to provide a budgeting tool to compare your spending against that of the report contained in the Budget Breakdowns.
Well worth a look for those planning for or in the retirement phase of life!!
We have just emailed out our summary of the 2010 Budget as it relates to personal finances and financial planning strategies.
This year's budget has provided a number of significant changes impacting on financial planning strategies.These have been outlined in this summary.The major changes include:
-Confirmation of income tax changes from July 1st 2010 increasing the effective tax free threshold from $15,000 to $16,000 for those earning $30,000 or less, the bottom of the 30% marginal tax rate threshold increasing from $35,000 to $37,000 and the current 38% marginal tax rate being reduced to 37%.
-A 50% discount commencing July 1st, 2011 on the tax payable on the first $1,000 of interest income generated by bank, credit union and building society accounts along with income from bonds, debentures and annuity products.
-A $500 standard deduction for work related expenses starting 2012-13, increasing to $1,000 for 2013-14 to simplify tax returns and lead to tax savings for many individuals.
-Superannuation guarantee contributions to rise from the current 9% to 12% by July 2019.
-A $500 superannuation tax rebate, commencing July 1st, 2012, of the contributions tax for those with incomes of up to $37,000.
-The superannuation guarantee age limit to rise from 70 to 75 starting July 1st 2013.
-A reduction in the company tax rate from 30% to 29% in 2013-14 and 28% in 2014-15.
-The company tax rate reductions to be brought forward for small businesses with the rate of 28% applicable from 2012-13.
-Small businesses to be able to immediately write off asset purchases of less than $5,000 compared to the current limit of $1,000.
-A permanent extension from 1st July 2012 of the eligibility for those over 50 to receive $50,000 of concessional contributions into super p.a. as long as superannuation balances do not exceed $500,000.
-The Net Medical Expenses Tax Offset to increase from $1,500 to $2,000
This Summary has been prepared as a brief summary of the 2010 Federal Budget as it impacts on personal finances.It is a publication of A Clear Direction Financial Planning.It contains general financial information.Readers should check this information with a professional financial adviser before acting on any of the material contained in this document.