With the news and controversy over the recent cuts to the Aged Pension (and other welfare payments), there is another side to this topic for retirees.
Without the Aged Pension how can you afford to retire?
When you reach retirement age and stop working, the regular income from employment suddenly stops. Retirement brings the need for a new source of regular income - maybe the Aged Pension (or part of), superannuation payment(s) from previous employment, or some form of self-funded superannuation.
An Aged Pension provides a regular income - maybe not adequate, but at least regular. If you can top it up from savings, all the better. If you are fortunate to some other type of pension income, for instance from a superannuation scheme, you may have a regular income - if it is adequate.
But for hundreds of thousands of aged Australians, including those on a part Aged Pension, the retirement-income question is getting complicated.
If you have a reasonable lump sum nest egg ready for retirement you have a head start. However we are all living much longer, and setting up the nest to last the distance is a difficult equation.
The trouble is, we are all living much longer. A person aged 65 years in Australia can expect to live for about 20 years (age expectancy for men 84.5 years, for women 87.3 years), according to the Australian Institute for Health and Welfare. That is a long time to have to generate a regular and reliable income without a regular job, and a long time to try to live on a nest egg.
It has been estimated that an average couple in retirement will need an income of about $35,000 per year ($653.00 per week) for a modest retirement, or up to about $60,000 per year ($1,150.00 per week) for a more comfortable lifestyle (source : superguide.com.au). Multiply these figures by 20 (life expectancy) and the bottom line can look rather scary.
With the baby boomers (those now aged between 54 and 71 years) approaching or stepping into their retirement years, that is a lot of people looking for a regular retirement income.
If we add together the 550,000 couples who have their own Self Managed Super Fund (source: ato.gov.au), the estimated 330,000 (plus) Age Pensioners who have had their Age Pension entitlements cut, and at least 100,000 Australians losing all Age Pension entitlements with the latest government welfare cuts (source: superguide.com.au), then add the thousands of others trying to live on some other lump sum retirement nest egg, we have well over one million retired or semi-retired Australians looking for a regular income.
A lot of baby boomers have sold their small business, farm or property to put together a retirement nest egg. But that nest egg will need to be invested somewhere reasonably safe to provide a reasonable and reliable income for retirement.
Historical low interest rates do not make that task any easier. With interest rates now around 3% (source:infochoice.com.au) it would take a lump sum of about $1.2 million to provide an income of just $36,000 per year. Safe, and reliable, but well out of reach for most of us.
However if the lump sum was a bit smaller, and the investment return a bit better, the nest egg can become a fairly safe bet. If we could achieve a 5% annual investment return on savings or a retirement nest egg, it takes only a $725,000 lump sum to provide the same annual income. And if the investment could achieve a return of 8% annual investment return, then you only need $450,000 nest egg to fund a retirement income of $36,000 per year. And these calculation do not include biting into your savings.
The difficult part is finding an investment that can return such a good rate of return. Finding such a good investment is certainly quite possible, but does require a steep learning curve.
Unfortunately there is no easy way to achieve such a good investment return. It will require your time, research and a steep learning curve. Learning to invest money wisely and productively is a new skill many of us will need to learn as we approach or enter retirement. One day a farmer/tradie/secretary /labourer, the next day an investor.
There are a number of investment possibilities that can achieve a good return on your investment nest egg, in particular in the Australian share market. A recent scan of the Australian stock market (source: marketindex.com.au) showed 15 stock paying over 6.0% dividend (plus franking credits). With franking credits that figure can easily reach 8.5 to 9.0%. Another 21 shares pay a dividend over 5% per annum, which with franking credits, gets very close to 8% return on your money. This return is in addition to any capital gain you make on holding the right shares.
Learning to invest on the stock market can be a fairly safe and reliable form of generating income from a retirement nest egg. However it does take a while to learn the skills necessary to become a good investor.
Over the next few months I am going to outline a step-by-step process in a series of articles in The Beagle to help those looking for a retirement income to learning to invest in the Australian share market.
However, first a disclaimer. I am not a licensed financial advisor. I am the Convenor of the recently formed Australian Shareholder Association (ASA) south coast discussion group. The Australian Shareholders Association is not a licenced financial advisor. These articles in The Beagle will not be offering or providing any financial advice. Before you make any investment decisions you should seek your own independent professional advice from a licensed advisor who is aware of your particular circumstances.
I am a self-taught investor, not an expert. My skills and experience is confined to the Australian share market. This column will journey through a range of investment topics including - stock market terms (and what they mean), where and how to get advice on possible share market investments, the work of the Australian Shareholders Association and other organisations in providing investment education for small investors, using the Internet and media to gather investment information, setting up an investment portfolio, how a Self Managed Superannuation Fund works (and why so many Australians have or want one), and other topics which I hope will be of interest to ordinary Mum and Dad investors looking for a way to fund their retirement.
In the meantime can I encourage you to join the local share market investors discussion group. The group has been set up by the Australian Shareholders Association, a not for profit organisation that provides education and advocacy services for small shareholders. This group meets once a month and shares information to help members learn about the share market. For more information please email me at southcoastasa@gmail.com, or phone me on 0419 612 401.
I hope you enjoy the investment journey in The Beagle over the next few months. Bill Radley
