In previous articles, we have written about the importance of ensuring that your biggest asset – your earnings capacity is protected.

A question we often get however is how do I know if what I have is ok?

There are many Income Protection policies on offer with many options but one of the biggest differences you need to understand what happens in the event of a claim with an Agreed Value Policy compared with an Indemnity Policy. The wrong option can have catastrophic consequences to your financial position when you need the cover the most.

In order to make the right choice, you must first understand the differences between these two options.

An Agreed Value Policy is signed off at the start, i.e. what level of income they’re willing to cover. It provides you with certainty at the time of insurance application, the amount that you have been insured for will be paid, if you need it.

Whereas with an Indemnity Policy, the benefit amount is estimated at the start but not financially assessed until the time of claim.

In both instances, you generally are able to insure up to 75% of your income, but the difference in the event of claim can be significant.

So which one is advantageous for you?

Indemnity Value Policies are usually cheaper when compared to Agreed Value. However, there is no certainty on the monthly benefits received upon the claim. Although Agreed Value income protection might be a little more expensive, it holds more value as it provides you with certainty on the benefit amount you will receive.

Indemnity value covers are suitable for people with a steady income over the years. However, it is quite common for things to change which may lead to the decline (sometimes only short term) of your income.

Possible reasons for a decline in income (which would impact on an indemnity claim but not an agreed value claim):

– You may be in a stable employment now but have you ever dreamt about starting your own business? Clearly, the goal would be to return to a similar or high income but this move can often lead to a short-term income drop and provide an exposure.

– You may wish to change your career entirely. This could involve further study and again a reduced income for a period of time.

– Your current industry or expertise may be subject to disruption which could affect your earning capacity or require further study.

– You may wish to reduce your working hours or start a family.

– You may have your hand forced and need to give up your career or dramatically alter your hours if a family member becomes very ill.

Unfortunately, one of the most tragic situations we have seen was with a middle-aged man who overtime had his work hours, job performance and income gradually get affected as a result of a debilitating mental health illness. The illness caused him to have to reduce his hours and responsibility and even take periods of unpaid leave. Rather than going on a claim in the initial stages, he struggled through perhaps in denial. The gradual decline in health eventually resulted in a claim; however, the claim was reduced as his pre-disablement income was actually lower than what it was when he took the policy out. Had he taken out an Agreed Value Policy, he would have been entitled to a higher level of income which would have provided much more financial support to him and his family and would have allowed him to focus on his recovery.

For anyone who has default Income Protection cover through work or a Superannuation provider, it is critical to understand these differences as often default insurance is on an Indemnity Policy basis.

It is also important to understand that the older we get the more “uninsurable we become” so locking in a good policy now while you are young and healthy can make a significant difference when you need the policy the most.

At JBS we help people assess their need for cover every day. We provide clients with piece of mind which allows them to get on with their lives in comfort knowing that they are covered. Please contact us so that we can provide you with the same level of comfort.

From the 1st of July 2018, if you are at least 65 years old and meet the eligibility requirements, you may be able to choose to make a downsizer contribution into your Superannuation fund of up to $300,000 from the proceeds of selling your home. Normally after age 65 you would need to meet a work test in order to contribute into Super, the great thing about this is that you don’t need to meet the work test to be eligible.

The contribution will not be counted as a Non-Concessional Contribution and will not count towards any contributions caps. The downsizer contribution can still be made even if you have a total super balance greater than $1.6 million, however if your balance is above $1.6 million you are still restricted to having $1.6 million in the pension phase.

The contribution is only able to be made once on the sale of one home, therefore if you sell a second home you can’t make the contribution again. There is also no requirement that you have to purchase another home or actually downsize your home as the name may suggest. In order to be eligible you must tick all of the following criteria:

– You are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit)

– The amount you are contributing is from the proceeds of selling your home where the contract of sale exchanged on or after 1st of July 2018

– Your home was owned by you or your spouse for 10 years or more prior to the sale. The ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale

– Your home is in Australia and is not a caravan, houseboat or other mobile home

– The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT asset (acquired before 20th of September 1985)

– You have provided your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer contribution

– You make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement

– You have not previously made a downsizer contribution to your super from the sale of another home.

It is important to note that if your home was owned by just the one spouse, the spouse that did not have an ownership interest may also make a downsizer contribution, provided they meet all of the other requirements.

The maximum contribution you can make under the downsizer rules is $300,000, or $300,000 each if a member of a couple. However, the contribution can’t be greater than the total proceeds of the sale of your home. For example if you and your partner sell your home for $400,000 you’re only eligible to make contributions of $200,000 each, or it can be split in another way such as $300,000 and $100,000.

You must also make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement. In some circumstances the ATO may at their discretion extend this 90 day period, but you will need to apply for it. It is also possible to make the contributions in multiple batches, but the total amount can’t exceed $300,000, and all contributions must be made within the 90 day period.

If you’re thinking of downsizing your home and wish to explore your options in relation to making downsizer contributions, please don’t hesitate to contact JBS and we can assess your options and eligibility. It is a really great opportunity to help build your wealth in a tax effective manner.

There are several different factors that determine how much you can afford to spend in retirement. Some of them are investment markets, super balance and lifestyle changes. One step that people generally procrastinate, which is important in their retirement planning, is figuring out how much is needed to spend in the various stages of retirement.

The below chart shows how retirement spending can change over time

Once a desired level of spending is determined, having a good draw-down strategy in retirement allows you to balance your expenses, savings and the way in which the retirement savings are invested.

A good draw-down strategy may allow you to balance the following objective.

1. Maintain a stable and comfortable standard of living in retirement
2. Maximise your Age Pension and any other potential social security benefits
3. Protect the value of your savings against being eroded by inflation and adverse market conditions
4. Provide you with access to your savings to pay for unplanned expenses (without significant penalties for early withdrawal of your capital), and
5. Minimise the risk that you will outlive your wealth, at least for essentials

Case Study
Consider a 65-year-old retired couple who has combined superannuation assets of $500,000 and want to make their savings last 25 years. The below chart shows the impact of different spending strategies for two of the most common account-based pension (ABP) investment portfolio options – conservative and balanced.

If the couple adopted a spending strategy of $50,000 per year, they have at least a 90% likelihood of success for both options (that is, their superannuation assets lasting at least 25 years).

Alternatively, if they spend $56,000 annually, the likelihood of success drops to 56% with the balanced option and 38% with the conservative option. The balanced option has a higher likelihood of success, due to its larger allocation to growth assets. This increases the portfolio’s expected level of both long-term returns and risk. In contrast, the conservative option is made up of more defensive assets.

Impact of spending strategy and investment option on likelihood of super lasting to age 90

Note: Includes the couple’s hypothetical Age Pension entitlements. Results reflect the superannuation and Government Age Pension rules applicable from 1 July 2017.
Source: Willis Towers Watson

What can you do to achieve your desired retirement lifestyle?
It’s important to have a spending and investment strategy in place that is flexible enough to respond to a variety of factors and risks, including the changing patterns of your retirement income needs. Unexpected lump sum expenses, external influences on retirement savings (e.g. adverse market movements) and regulatory changes must be considered.

It is good to have a trusted financial adviser who understands your retirement needs and can help you to make decisions about your investments in the future. We can help you through this process, so feel free to reach out to us.

Many of you would have automatic Insurance through your default Super Fund that you would have been signed up through your employer. But what you may not realise is some of the caveats in these policies.

1. Renewability of Cover:
Some super funds have the ability to cancel your cover when certain events occur. If you were to claim on this policy the insurer can simply decide to not cover you any longer. This puts you at potential risk of not being covered for a significant portion of your life. A retail insurance policy may guarantee your cover as long as your premium is being paid, giving you peace of mind if something was to happen to you.

2. Claims while off work
If you have default income protection cover within your Super Fund it is prudent you check the terms and conditions. Some insurance policies held in Super Fund may have a clause in their Income Protection policies that if you are unemployed for any reason, you will not be covered. For example this could be due to taking a long holiday or going on maternity leave.

3. Stepped vs. Level premiums
A stepped premium will increase each year as you get older, eventually becoming expensive. On a Level premium, you essentially lock in the premium at the age in which you take out the policy, and only indexes slightly each year. Although stepped premiums can be more beneficial in some circumstances, when holding cover for a long period of time level premiums are generally more affordable. Most super funds do not offer cover on level premiums, or if they do the cover usually decreases as you age.

4. Cover whilst overseas
Default cover within your Super Fund may not allow you to remain overseas for any length of time to receive treatment whilst on a claim. In order to meet their definition, you must either be in Australia to claim or return to Australia for treatment. Retail insurance policies may allow you to remain overseas to allow you to receive treatment and stay on claim.

5. Differing definitions of disability
Cover within Super Funds generally will only classify you as fully disabled once you can no longer conduct your occupation at all and needs to remain the case to continue the claim. This is fairly restrictive for members who may want to get back to work in some capacity. For example, there may be a member can work 1 day per week. A retail insurance policy may have a three tier definition of total disability

– Initially, you cannot perform one important duty of your regular occupation

– 10 hour definition – allows members to work up to 10 hours per week whilst on full claim.

– Loss of income definition – allows member to earn up to 20% of pre-disability income without losing any claim benefits.

We note however that these definitions can vary slightly between insurers but are generally very similar.

As always – check the details or give us a call
When comparing insurance within various superannuation plans, we often find that not only are the definitions widely different, but that often if you haven’t reviewed your cover for a while you might find that the premiums have increased significantly and as the insurance is coming from a default superannuation fund, you may be unaware of these changes.

If you would like a review of your current insurance policies and to get a better understanding of what you are and aren’t covered for, feel free to contact JBS.

– Peter Folk –

Most of us can only dream about leaving our work forever to do as we please. For those who are close to retirement however, this can be a time of excitement and relaxation. Spending countless days at the golf course or with our community groups, families and friends sounds like heaven on earth. The transition from full time work to full time play however may have some unforeseen pitfalls. Here are 5 facts about retirement that you should consider before retiring.

Time
One of the first things retirees quickly discover is that they have too much time on their hands with nothing to do. Playing a round of golf with mates or enjoying a drink at the bar will only fill up a certain amount of time in the day and you can’t go doing the same thing every day. Retired couples and singles alike will quickly become very unhappy once they run out of things to do.

Having ideas in your head about what to do in retirement is one thing; however actually doing them is another. Some experts are suggesting retirees have a day to day plan on what they want to do and even seek an adviser leading up to retirement. You will never be as busy as you were pre-retirement so it’s important to map out ongoing hobbies, part time work and social events before embarking on retirement.

Retired husband syndrome
Many couples get very excited about retiring together, travelling the world together and spending a lot of time together. If this is you then consider the fact that you and your other half may have been together for the past 30 years working full time. Aside from weekends and holidays, you never have to see each other for more than a couple of hours in the morning and night. Now all of a sudden you see each other 24 / 7 and may even start to discover that you can’t stand being together for a prolonged period of time. Determining your own hobbies, goals and friends will assist to avoid “retired husband syndrome’. Again, seeking help from an adviser may also assist in preparing you and your loving partner for retirement.

Not having enough money to fund retirement
Once retired you might have the goal to travel, see the world and complete your bucket list, unfortunately you might not have the funds to do so. Travelling can become very costly. A single international trip can set you back several thousand dollars if not more. By the time your second trip comes around you may find that your retirement funds are not adequate and you’ll need to start tightening the belt. Having a good financial planner early on can prepare you and set realistic goals for your retirement. This way you will have a clear expectation of what you can afford in retirement and prevent any nasty surprises once you’ve retired.

Entitlement to social security
At the moment the Australian pension age is age 65.5 and increasing with each year. During retirement some retirees aren’t aware of what social security benefits they’re entitled to. Even if you are receiving funds from your Superannuation benefits, you may still be entitled to a government age pension (subject to the income and asset tests). Having a good financial adviser by your side will ensure you’re kept up to date regarding any social security payments you’re entitled to.

Losing your identity from not being at work
For those of us who are passionate about our profession, this becomes our identity. Anytime your friends or family think of Engineer, Accountant or Doctor, they think of you. So it’s no surprise that once you retire you may feel like you’ve lost your identity, which may lead to discontent and even depression. Without the daily interaction of your work colleagues your mental and even physical health may start to deteriorate. Retirees who are not very active tend to decline rather quickly mentally and physically. Joining up to the local gym, taking up classes and just continuing to meet new people will have a longer lasting effect for you.

Financial independence gives you the freedom to make your own choices, speak to the team at JBS to start your retirement journey today.

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Over the next few years the age at which you can begin to start receiving the Age Pension will gradually increase from age 65 to age 67 (depending on your birthdate), with most people now having to be 65 and a half before they can access the Age Pension. Every time the Age Pension age increases or there’s talk of it increasing, you’ll hear all over the media people who now can’t retire because they have to wait a few more years before they can access the Age Pension.

Unfortunately for some, the Age Pension will be critical to fund their retirement, but the Age Pension age doesn’t need to be your Retirement Age. There’s a few things you can do to help reduce your reliance on the Age Pension and retire when you want to retire, our motto is that we’d rather you be working because you want to, not because you have to.

Super Contributions – Your employer pays 9.50% of your wage into Super as a Super Guarantee Contribution (SGC), but if your cash flow allows for it, you can top that up through a Salary Sacrifice arrangement or making Personal Concessional Contributions, up to an annual cap of $25,000 (which includes your SGC). This allows you to boost your Super Savings while at the same time helping you save tax personally.

You also have the opportunity to put up to $100,000 in as a Non-Concessional (After-Tax) Contribution and even up to $300,000 utilising the bring-forward rule in one year (if you haven’t made large contributions previously). Depending on your Super Fund, this can be a transfer of any cash you may have or even other assets such as shares. Remember that the new $1.6mil balance rules need to be taken into consideration.

Depending on your income, if you make a Non-Concessional Contribution the government may give you a Government Co-Contribution up to $500 on a $1,000 contribution (you can contribute more, but the co-contribution is based on a maximum $1,000). If your income is below $36,813 for FY18 you will receive the full $500 Co-Contribution, and you will receive a pro-rata amount if your income is above $36,813 but below $51,813.

Consolidate your Super – For some you may have multiple Super accounts, each time you start a new job your employer may start a new Super Fund for you if you haven’t given them the details of your existing Super Fund. If you’ve got multiple Super accounts it may be worth consolidating them into the one account which may help to reduce the total fees you’re paying on your Super accounts. However, you need to be careful that when you rollover any Super into another account you will lose any insurance you may hold.

Review your Insurance – Most Super accounts come with default insurance cover, and insurance is a very powerful tool to protect you and your family in case something happens to you. For those later in life, who are empty nesters, paid off the mortgage and are close to retirement, your need for cover may not be as important as someone who’s just starting a family and recently taken on a mortgage. Although insurance may be needed, it is always worth reviewing it on a regular basis to ensure your level of cover is appropriate and you’re paying for what you need, as the premiums come out of your Super balance. In some circumstances it may also be worthwhile holding some of your insurance cover outside Super.

JBS can help provide a full review of your Superannuation and Insurance and help you put strategies in place to ensure that you’re working because you want to, not because you have to. We’d rather you work towards your Retirement Age.

– Peter Folk –

An article on moneymag.com.au cited that “retirees with modest savings can be better off than those with more than twice as much”. The argument was that due to the new age pension rules introduced in January 2017, there was a ‘sweet spot’ where the income from the age pension and the return from your pension savings would be equal to the income received by someone with more savings who would not qualify for the age pension.

The below table sets out the results.

The assumption was that you would take the minimum amount from your pension account and combine it with your age pension entitlement. As you can see a couple with $1,050,000 will have the same amount of income as a couple with $400,000. What the analysis conveniently doesn’t include however is the capital value. It also only looked at 1 year and did not take into account what would happen in future years.

From a very simplistic view, lets assume that no capital is being drawn in either scenario and hence the capital values remain the same. This means that when the retirees die, they will have $605,000 more money available to pass onto their beneficiaries than in the scenario where the couple only has $400,000. Yes, the income is the same but the actual wealth is way different.

A second and more complicated scenario outlining how the person with more money is in fact way better off is if the capital is drawn down. Let’s assume an extra $10,000 per year, with an earnings rate within the pension account of a modest 5%.

The below table sets out the results.

In the above example, the person with $1,050,000 has a significantly higher regular income over time due to the higher amount of capital available to them and the requirement to draw down an increased minimum amount from their pension accounts as they get older.

The above graph also shows that even with the increased withdrawals, in this particular scenario you will still have considerably more assets throughout your life that you can also draw down on if you need to. Not only that but you need to remember that even if you do not qualify for any age pension at the start of your retirement, as your assets decrease over time you may end up qualifying for the age pension later on in retirement.

In fairness to the author of the original article, it was probably designed to indicate that in order to have a ‘comfortable’ retirement, due to the age pension, you can get by on a smaller pension savings balance. To suggest however that “retirees with modest savings can be better off than those with more than twice as much” is just plain wrong and doesn’t take into account all the pieces of the puzzle.

To speak to someone about growing your retirement wealth so you can have a better lifestyle in retirement speak to one of our advisers at JBS Financial Strategists.

– Liam Rutty –

As the baby boomers of Australia are now entering retirement, the topic of longevity risk within superannuation has become increasingly important. The longevity risk of superannuation refers to the risk of retirees running out of money in their super account before they die.

Contrary to the common thought of Aussies using up their entire super benefits earlier on, close to 50% of retirees draw down the minimum amounts from their super accounts, in an attempt to protect themselves against longevity risk. Whilst there are still a portion of retirees drawing down unsustainable amounts from their retirement benefits each year, it’s crucial to get the right balance in order to have a comfortable retirement. Furthermore understanding and managing the longevity risks in super can be the difference between having enough in retirement and running short.

There are 3 components of longevity risk which are;

Mortality Risk – This risk is associated with the chance of death along a certain time frame. With medical and technological advancements, the average life span of Aussies continue to increase each year, which means our super benefits need to also last that extra distance.

Volatility and Sequencing Risks – Volatility risk relates to the chance of suffering losses in our super funds due to volatility in the financial markets. Whilst sequencing risk is associated with the order of returns, which results in the retiree with less money due to losses suffered in the initial stages of retirement. Take for example the following table, which shows Tony and Mark, both starting off their retirement with $500,000 in super and drawing an annual income for $43,695 per annum (Association of Superannuaton Funds of Australia’s standard for comfortable retirement), from their retirement benefits.

As shown in the above table, over a 9 year period with an average return of 8%, we can see Tony is in a better position as his super fund performed really well early on in his retirement. Whereas Mark suffered poor performance early on in his retirement, which affects the balance of his retirements benefits in future years.

Expenses Risk – This risk is associated with the expenses depleting retirees super benefits early on in their retirement. Aside from the travelling and discretionary spending one type of expense that is commonly missed is medical and personal care expenses. Tied to morality risk, being able to live longer with the help of modern medicine and technology often doesn’t come cheap or free. As such taking into account medical and carer expenses, is crucial.

Ensuring sufficient super benefits in retirement can be very daunting, especially considering all the risks associated with longevity. There are however professionals such as financial advisers, who can assist in making the journey much smoother. Aside from being able to assist clients in reaching their retirement goals, an adviser can also help in determining an optimal amount to withdraw from super each year so their clients get a well-balanced retirement life.

– Andy Lay –

It’s been more than 6 months since the Superannuation reforms came into force on the 1st of July 2017, and now with the Christmas break over and done with and most likely back to your day to day routine, now is as good a time as any to re-focus on your Superannuation.

One of the more prominent changes to Super that came into effect was the removal of the concessional tax treatment of Transition to Retirement Pensions (TTR Pension). Pre 1 July 2017 any money held within a TTR pension received a 0% tax rate on any income or realised capital gains, however post 1 July 2017 money held within the TTR pension is taxed at 15% (same as accumulation).

However, any funds that are held within an Account-Based Pension still receive the 0% tax rate (for balances up to $1.6 million). Unless you’ve met a condition of release, such as attaining age 65, you’re unable to commence an Account-Based Pension. The most common conditions of release are:

– Reaching preservation age (currently age 57 – depending on your date of birth) and retiring
– Reaching age 65

For superannuation purposes, a member’s retirement depends on their age and future employment intentions. A person cannot access Superannuation benefits under the retirement condition of release until they reach preservation age. At this stage, the definition of retirement depends on whether the person has reached age 60.

If you’re under age 60, then meeting a condition of release is a bit harder, effectively you generally have to completely cease employment and have the intention never to again work more than 10 hours per week. However, if you’re over age 60 (but under age 65), simply having a change of employment post age 60 means you may be able to satisfy a condition of release, opening up an opportunity to move your Super wealth into the tax-free pension environment.

For example, let’s say John (age 62) works full-time in a Supermarket, but for 6 weeks he was contracted to work on the Weekends as a Labourer. After 6 weeks John has stopped work as a Labourer, because of this John has now met a condition of release and can move his Superannuation savings into the tax-free environment. However, any later contributions made (employer and personal) and earnings will be preserved (i.e. can’t be accessed until a new condition of release is met).

Based on the above, if you’ve been operating a TTR Pension and potentially could meet a condition of release, you may be able to continue to receive the tax-free pension on your Superannuation benefits. Here at JBS we can help assess your options in relation to meeting a condition of release.

– Peter Folk –

Sometimes when you read an article that resonates with you, well you just have to make a video about it!

In Warren’s latest #RetireRight video he shares some of the take outs from an article on Brandon, a 34 year old young man who achieved financial independence at the age of 34 and freaked out on his first day of retirement.

“Brandon wrote that financial independence was something I talked about and thought about so much that it just became this abstract concept in my mind and didn’t relate to anything in real life. It was a long-term goal that I guess I never actually pictured achieving.”

Check out Warren’s video where he discusses some of the learnings that are critical to giving yourself a choice about retirement. Here is the link to the article where Brandon is featured.

You’re never too young and never too old to start thinking about your retirement!

– Warren Hanna –