Cash flow management in retirement – have you got it right?

Paying BenefitsUnderstanding SMSFs

Cash flow management in retirement – have you got it right?

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For those nearing retirement, it can be an exciting time or a rather difficult one. Exciting if you are confident that you have saved enough to comfortably fund your retirement; difficult if you are not so sure.

There are two sides to this often asked question of have I got it right and saved enough?

The first part of the answer is knowing how much you spend (or will spend in retirement) in order to know what level of income you will need in retirement.

The second part of the answer to this question lies in having a good understanding of exactly how much capital you need to have saved to fund that particular level of income.

Doing a budget now

Knowing how much you spend each week or month and what you spend your money on is a great way to start to get a handle on your income needs in retirement. This is because some expenses will continue on into retirement, while others will either be substantially reduced or disappear altogether.

It is also important to identify expenses you consider provide the necessities of life as opposed to those that are nice to have but are essentially discretionary.

Your expenses moving into retirement

Don’t forget that costs associated with work, such as work specific clothing, transport to and from work, maybe even the second family car are probably not going to be needed once you have retired.

Alternatively, the expenses associated with maintaining the family home, utilities, casual clothing, food, running costs of at least one car for a number of years and so on, will continue on into retirement.

Remember too that in the early years of retirement especially, those overseas trips or tours around Australia that you always planned to do, are costs that you may have not had before.

Later, failing health may mean fewer trips and expensive holidays, but could mean increased medical expenses. In other words, discretionary expenditure may be replaced by non-discretionary costs.

Getting used to budgeting now can make this process much easier in retirement. And as you can see, this is not a set and forget exercise. As your circumstances change, you need to reassess your spending habits and adjust them according to your means.

How much do I need to save to fund by estimated expenditure?

This is a difficult question to answer with a high degree of certainty, as it is based on a number of assumptions and unknowns which can impact on the end result.

Having said that, the SMSF Association and actuarial firm, Accurium, surveyed and analysed the data of 65,000 SMSFs to try to give some answers to this question.

A comfortable level of income in retirement is often quoted as being in the vicinity of $59,000 per year for a couple. A myriad of alternative possible returns were analysed in the research undertaken and the amount of capital in super needed to achieve this level of income per year in retirement with a 95% certainty was just over $1 million.

If you aspire to higher levels of income in retirement, but with the same 95% certainty of achieving that income, then you will need to accumulate more. For an annual income per couple of $70,000 the research suggested that capital of $1.45 million was needed. For aspirational income levels of
$100,000 per year, a couple would need $2.4 million.

While these numbers are indicative only, they show the levels of savings that can reasonably be expected to be needed to fund these differing levels of income in retirement.

Is there anything else you need to be aware of?

Do you have an income stream?

Once you commence an income stream, tax benefits will flow to your SMSF. In order to protect these tax benefits, certain things must happen in relation to your income stream.

As trustee, you should be aware that the law requires that a minimum amount be drawn as a pension each year. This is calculated by applying a percentage factor (determined by your age) to your account balance at 1 July each year. For example, the percentage factor for someone up to 65 years of age is 4%. That is, you must pay yourself an income stream equivalent to 4% of your account balance at the beginning of the year.
If you do this, your SMSF will pay no income tax on the investment income derived by the SMSF assets which support that income stream. If you don’t pay at least this minimum, the tax benefits at the fund level are lost and your SMSF will pay tax on this investment income.

Trustee obligations to meet expenses

As trustee, you have an obligation to ensure that your SMSF can meet its obligations as they fall due. These obligations include the ability to make income stream payments to those members entitled to receive them on the terms agreed at the commencement of the income stream.

A failure to do so is a failure of your obligations as trustee.

It is therefore advisable to carry more cash once an income stream commences, sometimes up to two years’ worth of payments in cash or equivalent investments.

This higher weighting to cash would also need to be reflected in the investment strategy of the SMSF.

Good planning is key

Planning for retirement can be a precise and exacting exercise. Hoping for the best without informed decision making is not likely to achieve the goals and lifestyle you are aspiring to in retirement.

It would be wise to seek the help of an appropriately qualified professional, such as an advisor accredited by the SMSF Association, to ensure your retirement plans will achieve your well-planned goals.

The ‘self’ in ‘self-managed super fund’ doesn’t mean you need to go it alone. Visit our ‘Find a Specialist’ function to discover an independently endorsed professional closest to you.

Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.