Recently I was asked to write a piece for the July issue of Money Magazine.  This was for the Ask The Experts section (I have also commented in the current, June issue which is out today).  Here it is below – I have changed the names.

Ask the Experts

ASK THE EXPERTS

NAME: Paul and June

STATUS: Both are pensioners with Paul working part-time

QUESTIONS: Where is a safe place to invest that pays around 5%? How do our savings fit with the age pension to provide our retirement income?

BACKGROUND:

Paul and June have an investment dilemma that is widespread among Australian pre-retirees and retirees. With cash and term deposit rates so low, where do they put their money? They need to generate an income to live on. June has retired and is on a disability pension. Paul works part-time and is on a part age pension. They own their home and have around $290,000 saved for their retirement years. It isn’t in superannuation and they have invested it in a term deposit, earning 2.75%, but when it came to rolling it over recently, the term deposit rate had dropped. A financial adviser at the bank that handled the term deposit has offered to invest it into an investment portfolio in an allocated pension. The price tag for the planner’s financial plan, if Paul were to proceed, is around $4,000 or around 1.4% of their investment. He gets lots of advice from people who tell him that they are making good money in this investment climate, in the region of 8% or 9% pa.

Paul explains that they don’t want to put their retirement savings in any risky investments. “We can’t start over again,” says Paul. He wants to know if there are any investments without any volatility. Or are there any guaranteed returns on investments? “I would like to invest somewhere that will give better returns, I really want our life savings to be safe, and be able to sleep at night,” explains Paul.

Paul would like to know what sort of income he and June can expect for their retirement. How can his savings, earnings from part-time work mix with the age pension? “I figure that we can have a good life if we have around $1,000 a week (but wonder if that sounds a bit greedy) to live on. We like to take a holiday once a year for around two weeks.”

Paul and June need their money to outstrip inflation. The Reserve Bank of Australia is expecting inflation to be around 2% over the next year and this means that if their cash is only paying 1.5%, then their return isn’t keeping up with the cost of living. To avoid their money from going backwards, they need to find income at a higher rate.

​June has another $11,000 in savings

They have two grown up kids.

Paul is 68 and works delivering goods for 25 hours a week.

June would love to work but her health hasn’t been good. She goes to zumba and other social events.

My Response

Firstly, I think the fee that you have been asked to pay for financial advice seems on the high side.  Particularly from a bank planner – though the bank you went to has a reputation for charging excessive fees.

Find an adviser who has good reviews from their clients and who is well qualified, local to you.

If you want guaranteed returns you really can only use a bank with term deposits.  Because Paul is working, he is paying some tax now – $2,700 last year.  So it may be worth considering moving your money into Superannuation and then starting an Account Based Pension (or Income Stream).  The latter will have zero tax on the earnings and zero tax on the payments.

When you do this, you will need a super fund that offers you bank term deposit rates and pays well on cash rates.  The rate will be low but that is the price for zero volatility.  Also avoid anything that sounds like a term deposit (like a debenture) that pays an attractive interest rate.  Many investors have lost their money in these types of products over the years – it must be with a bank.

Your adviser will be able to work out how much money you should withdraw from the income stream, and should also model for you how long the money might last.

Whether you hold your money in an ordinary bank account or in the super/income stream environment won’t make a big difference to your Aged/Disability Pensions – the money will still have a ‘deeming’ rate applied to it in any event – 1.75% on the first $81,600 and 3.25% above that.

Paul you are earning $32,000 per annum from your delivery jobs, and you enjoy that work.  You are receiving $400 a week each from Centrelink and now you are also getting a UK pension that equates to $88 per week.  So you are already getting your $1,000 per week.  Your wish is consistent with the ASFA retirement standard – where a modest retirement for a couple is $670 per week, whilst a comfortable retirement is $1,153 per week.  So you’re not being greedy!

Therefore, you should only need to take the minimum amount from your income stream, which starts for you at 5% of your $290,000 – or $279 per week.  This money could go into a ‘holiday account’ – you could use it to fund your annual holiday, along with funding any emergency spending.

Paul you will be able to contribute a non – concessional contribution of $180,000 before 30 June 2017.  This will reduce to $100,000 per annum from 1 July 2017.  So you may need to organise these contributions over a period of time.