The federal government’s recent Budget announcement brought with it some particularly significant news for lenders and advisers. From 2035, the official retirement age will be 70 years old, meaning those born after 1965 will have to wait an extra five years to receive the aged pension.
It’s a policy change that necessitates some strategic thinking among advisers and their clients when it comes to both wealth creation strategies, and planning the transition to retirement. The retirement age has often been the traditional way that banks and advisers divide clients between the wealth accumulation and distribution phase, and thus plan their investment strategies and finance needs.
A delayed transition between these two phases means the financial strategy for the client must also be reshaped. A further five years of full-time work extends the period that clients will have a steady income to fall back on, meaning that they can stay in growth assets, such as investment property, for longer.
The client will also have more time to settle any borrowing obligations, opening up the possibility of borrowing facilities later in life that they may previously have not had access to. Through continuing to grow their investments and receive an income from work, they may be able to undertake projects such as property renovation using debt finance that could significantly improve the value of their assets in the post-retirement years.
Growth is still important, even in retirement
The change in the pension entitlement age is reflective of Australia’s increased life expectancy rates – according to the ABS, a man who is 65 this year is now expected to live until 84 on average, while women are expected to live until 87. Many of course live significantly beyond this point, meaning it’s important for clients to have assets structured in a way that capital is continuing to grow sufficiently, both up to and beyond retirement.
A good approach is to sit down with the client and plan this transitionary period in detail, taking into account the following:
• Annual income required for a comfortable lifestyle over the post-retirement period, including incidentals such as annual holidays
• Any existing assets and the income and capital growth they’re likely to generate, factoring in inflation
• Any associated costs currently incurred as a result of these assets.
This will give a clearer idea of any gaps in the strategy that need to be addressed to ensure adequate growth of assets to cover the full post-retirement period. If the client’s net position is below the desired level, it’s prudent to consider strategies to boost capital – for instance, continuing part-time work beyond the age of 70 to delay super draw-downs, or downsizing to a smaller property to reduce costs and release equity for investment.
Whichever way you look at it, the changing regulations present a critical opportunity for assessing and re-shaping retirement strategy, both for you as an adviser, and your clients.
As Head of Adviser Services at Investec, Gareth’s role is to develop a deep understanding of the adviser market and deliver a range of bespoke products and services that help advisers achieve their personal and business goals.
Disclaimer: Investec Bank (Australia) Limited ABN 55 071 292 594, AFSL and, Australian Credit Licence 234975. Investec has not considered your objectives, financial situation or needs in preparing this advice. Before acting on any advice please consider the appropriateness of the advice for you, having regard to your objectives, financial situation and needs
