???Question: My wife is 67, works two days per week and earns net weekly income of $275, plus a contribution from Centrelink of $60. She has $32,700 in super plus 1175 IAG shares. I am 65 and work full time. My net weekly income is $810. I have $780,000 in super, $43,000 in a bank account earning 1.75 per cent interest, $120,000 in a term deposit that matures in January, at 2.6pc, and 400 Telstra shares. We own our home. In the immediate term we will need $90,000 for home repairs that will come from the term deposit. At retirement should we cash in our shares? What sort of return can we expect from our remaining super and cash? K.F.
Answer:I don't see any need to sell shares unless you need the cash and, as you say, your deposit will cover the cost of your home repairs.
Telstra's share price has sunk like a rock over the past 15 months and, at around $3.45 at the time of writing, has lost over half its value since peaking at around $7.30 in early 2015, largely because the market is expecting the company to cut its next dividend, currently showing an unrealistic 8.8 per cent yield.
Unless you desperately need the money, which you don't, remember the old rule of the bazaar, Buy low, sell high! So I would suggest holding on until the price recovers. Admittedly, this is a long-term view and the price is still higher than the 2010 low of $2.55. But even if the dividend is cut in half, the yield, plus franking credits, would still be better than a term deposit. I expect IAG share prices to head up over the medium to long term so, again, hold on.
If you take the minimum five per cent pension that must be paid from a super fund to people aged 65 to 74, you can expect around $39,000 a year from your fund. The more you withdraw, the faster the money runs out.
If you have adult children, have you thought of minimising any possible 17 per cent "death tax" on super benefits you might leave behind? If so, withdraw $100,000 each financial year and have your wife recontribute a non-concessional contribution, or NCC, into her super fund (because she only has a small total, probably all Taxable Component), as long as she works at least 40 hours within 30 days each year. The money then forms Taxfree Component, untaxed on withdrawal. Just make sure she makes no other NCC that year.
If you both enjoy your work, and women in particular often find it a pleasure to get out of the house after decades raising children, why retire? Retirement could prove less satisfying than work which, after all, gives you a reason to get out of your jarmies!
Question: In a recent column, you mentioned that the Pensioner Concession Cards would be returned to people who lost their pension on January 1, due to the changed assets test from July 1. I have just had a letter from my local council asking for validation of the PCC card. Do you know when this might happen? A.I.
Answer: Pension cards that were lost as a result of changes to the assets means test on January 1 will be returned tomorrow, on October 9. The Low Income Health Card, issued after January, will be cancelled.
Question: I am 55, my husband is 58, and we have a mortgage of $400,000 on a house valued at $1.1 million. We both work full time and have no dependents. Our combined income is $160,000. My super balance is $350,000 and his is $400,000. In the next five-10 years with aging parents likely to depart this life we look to inherit $500,000. We are keen to cease work at around 65 years, but are worried we will need to keep working well beyond that. Should we be looking at transition to retirement schemes, salary sacrificing into super etc? We hope to be able to continue to have the occasional overseas trip while we are still fit enough to enjoy it. Are we on track to a retirement of constrained finances or are we OK? S.D.
If you aim to retire debt free, it reduces the demands on a retiree's (usually) limited income, so I always suggest planning to pay off your mortgage by retirement.
Now if you each earn $80,000 a year, your combined after-tax income is around $121,000. So to pay off your mortgage in seven years, which will cost $67,850 a year, it will take 56 per cent of your take-home pay, assuming a five per cent mortgage rate. If the interest rate rises to seven per cent, the figure that banks need to use to "stress test" a borrower's ability to pay, repayments could rise to 60 per cent, assuming no salary increases. Either amount would severely limit your ability to salary sacrifice extra amounts into super, which I think you would need to do, on top of having overseas holidays.
You don't mention how much you need to live on, but if it is currently around $60,000 a year, which happens to be in line with the Association of Superannuation Funds of Australia's retirement standard for a "comfortable" retirement, you will need around $73,000 in seven years' time, if inflation averages 3 per cent. I suspect rises in inflation are going to surprise us.
So if you are aged 62 when your husband retires at 65, you will need over $1.5 million in super, producing an untaxed income stream, to last your life expectancy of 25 years plus, assuming you are healthy, a further five years. As some are saying, 100 is the new 80!
In seven years' time, the age pension age will be 67, in 10 years' time, 68 and, by 2035, 70. It sounds as though ceasing work will restrict your lifestyle, so why not enjoy work, and enjoy spending more, for as long as possible? Money may not guarantee happiness, but it gives you more choices!
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808; Pensions, 13 23 00.