Funding Your Retirement potx

Funding Your Retirement B u i l d y o u r w e a l t h w h i l e y o u w o r k ; M a k e y o u r m o n e y w o r k i n r e t i r e m e n t Funding You r Reti rement prelim.indd iprelim.indd i 3/25/11 9:23 AM3/25/11 9:23 AM First published 2011 by Wrightbooks an imprint of John Wiley & Sons Australia, Ltd 42 McDougall Street, Milton Qld 4064 Offi ce also in Melbourne Typeset in Granjon 12/15 pt © Max Newnham 2011 The moral rights of the author have been asserted National Library of Australia Cataloguing-in-Publication data: Author: Newnham, Max. Title: Funding your retirement: a survival guide /Max Newnham. ISBN: 9780730375081 (pbk.) Notes: Includes index. Subjects: Retirees — Australia — Finance, Personal. Retirement — Economic aspects — Australia. Retirement income — Australia. Retirement — Australia — Planning. Dewey number: 332.0240140994 All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above. Cover images: © Stiggy Photo, 2011; © Danny E Hooks, 2011; © STILLFX, 2011; © Robyn MacKenzie, 2011; © lakov Kalinin, 2011. All images used under license from Shutterstock.com. Table 3.4 and tables 17, 18, 19, 20, 21, 22 in appendix: reproduced with permission from Centrelink. Rates are current as of March 2011. Readers need to refer to <www.centrelink. gov.au> for up-to-date Centrelink information. ‘The 10 worst stock market crashes on the New York Stock Exchange since 1900’, pages 178–179. Source: <www.frankrank.com>. Used with permission. Tables 3.1, 3.2, 4.1, 4.2, 4.3, 6.3 and tables 3, 4, 5, 6, 7, 8, 13 in appendix: © Australian Taxation Offi ce. The ATO material included in this publication was current at the time of publishing. Readers should refer to <www.ato.gov.au> for up-to-date ATO information. Printed in Australia by Ligare Book Printer 10 9 8 7 6 5 4 3 2 1 Disclaimer The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specifi c guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication. prelim.indd iiprelim.indd ii 3/25/11 9:23 AM3/25/11 9:23 AM iii About the author v Acknowledgements vii Introduction ix 1 The history of funding your retirement 1 2 How to plan for your retirement 13 3 The retirement rules 31 4 Income tax and your retirement 59 5 The different investment vehicles 97 6 Strategies for funding your retirement 115 7 Managing risk 153 8 Understanding investments 175 9 The facts and myths about property investment 209 10 Getting the right advice 227 11 Questions and answers 233 Appendix: reference tables and lists 265 Glossary 277 Index 291 Contents prelim.indd iiiprelim.indd iii 3/25/11 9:23 AM3/25/11 9:23 AM Also by Max Newnham Tax for Small Business: A Survival Guide Self Managed Superannuation Funds: A Survival Guide prelim.indd ivprelim.indd iv 3/28/11 6:54 AM3/28/11 6:54 AM v Max Newnham is a chartered accountant who has been working in public accounting since 1974. He is a partner in the fi rm TaxBiz Australia, which has two offi ces in the outer eastern suburbs of Melbourne and looks after clients from all around Australia. Like many chartered accountants, Max started his professional life in auditing, moved into insolvency, and then found his niche in looking after the tax, accounting and fi nancial affairs of small business owners and individuals. Worried about the quality of fi nancial advice his clients were receiving from commission-driven fi nancial planners, Max became a certifi ed fi nancial planner (CFP) and gained the designation of Chartered Accountant — Financial Planning Specialist. He is also a specialist adviser on self man aged super funds (SMSFs) to the Self-Managed Super Fund Pro fessionals’ Association of Australia. During the mid 1980s, when Australia had, in Max’s opinion, the world’s greatest treasurer, Max mounted a media campaign against the Australian Taxation Offi ce (ATO), which was disadvantaging low-income earners who had been made redundant. This campaign led to the Hawke government issuing legislation to force the ATO to stop overtaxing lump sum termination payments, and was also About the author prelim.indd vprelim.indd v 3/25/11 9:23 AM3/25/11 9:23 AM Funding Your Retirement vi the start of Max’s writing career. The fi rm he was working with at the time, recognising his interest in tax issues, asked Max to write tax articles that they issued as press releases. When he started his own fi rm in 1989, he became a columnist for the weekly Money section in the Melbourne’s The Age and The Sydney Morning Herald. The topics Max covered in these articles increased in range to include not only tax, but also small-business issues, superannuation and investing. At the same time Max attended his fi rst federal budget as part of The Age’s budget coverage team, preparing tables and other analysis related to budget and tax issues. Since 1989 he has covered every federal budget except for one. The articles he loves writing most come from interviewing people, ranging from Lindsay Fox to The Waifs, about what it takes to be successful in business. A collection of these stories formed his third book, published as Great Aussie Success Stories. Keeping up with these modern electronic times, Max now also writes weekly columns for the online version of Fairfax publications on small business and investing issues. Max’s fi rst book dealt with the introduction of the goods and services tax (GST), and the second with the introduction of the new superannuation system. He has written three books for Wiley: Tax for Small Business, Self Managed Superannuation Funds, and now this one, which are all written as survival guides. Max lives in an outer eastern suburb of Melbourne in the beautiful Dandenong Ranges. He and his wife are fast becoming empty-nesters (not before time) and are looking forward to a long and happy retirement in the not too distant future. Their six children have all embarked on different careers and they have two grandchildren, an old dog, and a young puppy that keeps everyone on their toes. prelim.indd viprelim.indd vi 3/25/11 9:23 AM3/25/11 9:23 AM vii There are many people I need to thank for having helped through the gestation period and the birth of this book. First of all, thanks to Kristen Hammond from Wiley, who alternated between being my mentor and chief whip cracker, liked my idea for this book and came up with its title and so its direction. To Daniel Dutt, my right-hand man at TaxBiz fi nancial services, a big thank you for proofreading the chapters relating to fi nancial planning. My wife, Liz, deserves a medal for shouldering more than her fair share of the household duties while I wrote this book. To all of the editors and subeditors I’ve worked with over the years in the Fairfax organisation, thank you for giving me the opportunity to fulfi l a lifelong ambition to write — and even get paid for it. Thank you to Michael Wilkinson who talked me into writing my fi rst book, and Steve Berry from Fairfax Publications for championing my next two books. Steve, you are sorely missed. A last big thank you to Mr Wallace, my fi fth form English teacher at Mitcham High, who failed me in his subject. This meant I repeated the year, got to do an extra year of accounting, and ended up in a class where the girls outnumbered the boys by fi ve to one. Acknowledgements prelim.indd viiprelim.indd vii 3/25/11 9:23 AM3/25/11 9:23 AM prelim.indd viiiprelim.indd viii 3/25/11 9:23 AM3/25/11 9:23 AM ix This book is meant to be a practical guide for anyone interested in having a fi nancially secure retirement. At times technical points must be discussed, but this book is designed to be a step-by-step guide to help people who want to help themselves. It is not a get-rich-quick, or get-rich-slow, guide based on teaching the principles of borrowing against property and becoming a tycoon that way. It won’t explain the mysteries of foreign exchange or derivative trading so you have some secret way of making money known only to the incredibly clever. And it won’t tell you how you can apply the principles of some of history’s greatest share investors and become as rich as Warren Buffett. This is a book about having a balance in life and investing that takes the long-term view. It does not come from my having studied endless tomes about theoretical investing. Instead it comes from more than 50 years of personal investing and from almost 40 years of advising people about money and tax. You will notice that the title of this book is not ‘Saving for Your Retirement’. This is because there is a major difference between saving and investing. Saving is what most people do when they put money in bank accounts, Introduction prelim.indd ixprelim.indd ix 3/25/11 9:23 AM3/25/11 9:23 AM [...]... part of funding your retirement is managing both your investments and your expenses to ensure your funds last as long as they need to Although this appears to be an obvious step it is one often missed It is all about organising your investments so they produce enough income, and controlling your expenses so they don’t exceed your income so you are forced to sell investments This concept of making your. .. financial calculators for the calculation Once you have entered your desired level of retirement income they will work out how much you will need to fund your desired retirement income; how long your retirement savings will last; and, depending on your current retirement investments, how much you need to invest from now on If you enter the words retirement calculator’ into a search engine, you will be given... working life into retirement Funding retirement Changing attitudes to retirement have meant more and more people are planning for their retirement rather than just accepting what they end up with This has led to the growth of not only superannuation in Australia, but also the increasing popularity of self managed super funds (SMSFs) 6 Ch-01.indd 6 3/25/11 9:14 AM The history of funding your retirement The... 3/25/11 9:23 AM Funding Your Retirement about helping you find gold dust rather than being buried in bull dust This also brings me to another important fact about planning for your retirement: without some sacrifice and financial pain there can be no gain or achievement of your retirement goals It is the sacrifices you make today that will make all the difference when you retire This does not mean your lifestyle... much income you want or need in retirement, what your retirement savings are now and when you want to retire, the better chance you will have of putting in place a plan to achieve your desired retirement goals The consequences of not planning to fund your retirement will be working until you drop; living off a minimal government pension; or trying to get support from your kids whose inheritance you... en your retirem Trying to work out how much money you will need to fund your retirement can seem like an impossible task Like most problems, it cannot be solved completely You can, however, follow a process that will give you the answers you need The first part of the process is to break down the problem into its smallest component parts When it comes to funding your retirement the questions to ask yourself... yourself are: What are your financial, lifestyle and retirement goals? How much money will you need in retirement? What do you own and owe now? How much income do you earn after tax? How much money do you need, not want, to fund your lifestyle? Once you have answered these questions, you need to put in place a plan to achieve your goals — accumulating enough investments to fund your retirement and managing... content; and this income funded your lifestyle then No doubt your income now is considerably higher, but if you have not put in place financial plans for your retirement, the amount you are spending on your lifestyle has no doubt simply increased in proportion to the amount by which your income has increased The secret to wealth creation, and maximising the funds you will have in retirement, is all about diverting... 9:14 AM How to plan for your retirement Source: What are your financial, lifestyle and retirement goals? You cannot plan how to fund your retirement in isolation Plans must be made as a part of working out what your other life and financial goals are These can include: funding private school education for your children taking the family on a holiday building an investment portfolio... h e your retirem Before taking a look at the history of retirement, and how people have provided, planned and funded their retirement, it is important to define what retirement is Webster’s Dictionary defines retirement as ‘a withdrawal from one’s position or occupation or from an active working life’ In practical terms, retirement means different things to different people An essential aspect of retirement . of funding your retirement 1 2 How to plan for your retirement 13 3 The retirement rules 31 4 Income tax and your retirement 59 5 The different investment vehicles 97 6 Strategies for funding your. money to enjoy my holidays. Another important part of funding your retirement is managing both your investments and your expenses to ensure your funds last as long as they need to. Although this. AM3/25/11 9:23 AM Funding Your Retirement xvi about helping you fi nd gold dust rather than being buried in bull dust. This also brings me to another important fact about planning for your retirement: