I strongly believe that the easiest way for anybody to make a significant difference to their financial situation when they retire is to understand the importance of getting the best return possible on their superannuation.
If you happened to watch Channel 7 news last Friday night you would have seen me talking about the huge difference that the rate of return makes to your final balance.
The table below from SuperRatings demonstrates it superbly. It shows estimated returns for superannuation funds in accumulation mode for various time periods in three different investment options.
I have long recommended that anybody under 55 have the bulk of their superannuation in a Growth option, possibly moving part of it to a Balanced option as they get older, if they consider it appropriate after a discussion about goals and risk profile with their adviser.
The conservative Capital Stable option, which many younger people end up in by default, because they have not taken the trouble to check where their super fund has put them, is a terrible place for younger investors to hold their superannuation.
Let's go now to the Super Contribution Calculator on my website, www.noelwhittaker.com.au, and run two scenarios for a single individual.
Let's assume it's a person aged 25, with $15,000 in super now, on a salary of $35,000 a year, with the standard employer contribution of 9.5 per cent. Their contributions are taxed 15 per cent, and their salary increases at 4 per cent per annum.
We will run the numbers first using 5.7 per cent, which is what their superannuation may average per year if their super is invested in the Capital Stable fund throughout their working life. After 40 years their superannuation balance may be $907,811.
Now leave all those assumptions the same except the estimated rate of return. Change that to 8.5 per cent and see that after 40 years their superannuation balance is now predicted to be $1,845,618. The difference in rate has been worth over $937,000 to their superannuation in retirement.
I can't think of an easier way for a young person to earn nearly $1 million. All they need to do is contact their superannuation fund and allocate their asset mix into growth investments.
What you should do now is run the numbers for your own superannuation fund and take action if necessary. Remember, a person who retires now, aged 65, may well have 30 years of investing ahead of them. Investing too conservatively can leave them open to the major risk of lasting longer than their money.
Question:At 65 I am approaching aged pension eligibility age. With a lifelong habit of saving rather than splurging I am wondering whether my old habits are still a good idea. I concede there would be lots of variables but could you advise, for a typical retiree, at what level above the thresholds their asset savings would need to be before they constitute a viable income source rather than a financial liability?
Answer. There is no simple answer, but, as assets increase, a pensioner is almost certainly going to be assessed under the assets test, and not the income test. An exception could be if they are receiving a substantial private pension which could have them tested under the incomes test. Every $100,000 of assets that you dispose of will increase your pension under the assets test by $7800 a year - therefore, it would take you almost 13 years to make up for every $100,000 disposed of to qualify for a pension, or an increase in pension
Question. How does Centrelink treat investment properties that have risen in value - does the pensioner have to get a valuation each year or act dumb till found out? And do they need to get for an acceptable valuation or would a letter from the local real estate agent be enough?
Answer. Department of Human Services General Manager Hank Jongen tells me that customers of the department are required to inform them about any changes in the valuations of their investment properties.
To maintain the current market value of properties owned and declared by customers, the Department obtains property market analytics on percentage growth or decline in real estate values for each postcode from an external provider specialising in this area. The annual growth rate (positive or negative) for each postcode is applied to assessable properties that are subject to indexation (i.e. houses, townhouses & units / flats) within the relevant postcode.
The Department automatically updates real estate values by applying an indexation amount each year to eligible properties to keep their value up to date but they may update it sooner if there's been a significant change to the values.
Where indexation is not appropriate, they will determine when an updated value of the property should be obtained and cover the cost of that valuation.People can update their real estate asset information using their Centrelink online account through myGov.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. firstname.lastname@example.org