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ISSUE 8 DECEMBER 2018

Retirement Affordability Index

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2019 survival guide What you should know to make the most of your retirement savings

www.yourlifechoices.com.au


Will your lifestyle look so rosy if your savings dry up? We all aspire to live longer, but what happens if we live longer than our savings? Fortunately, a Challenger lifetime annuity pays a guaranteed monthly income for life. Talk to your financial adviser or call us on 13 35 66

Talk to your financial adviser or call 13 35 66 Challenger Life Company Limited ABN 44 072 468 938, AFSL 234670 (Challenger Life) issues Challenger annuities, which offer a range of terms, payment frequencies, return of capital and inflation options. Before making an investment decision, consider the current product disclosure statement (available from a financial adviser or www.challenger.com.au) and the appropriateness of the annuity to your circumstances (including the risks). The word ‘guarantee’ refers to payments Challenger Life promises to pay under the relevant policy document. 34964/1118


Contents Five things you should know about retirement 4 Financial adviser Emmett Wilkinson explains the myths, risks and straight-out untruths about retirement

Published by: Indigo Arch Pty Ltd Publisher: Kaye Fallick Editor: Janelle Ward Copy Editors: Haya Husseini, Olga Galacho Writers: Matt Grudnoff, Emmett Wilkinson, Shane Oliver, Myfan Jordan, Joel Pringle, Olga Galacho, Janelle Ward Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9885 4935 All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes. IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor. Copyright Indigo Arch Pty Ltd 2018

Making your money last a lifetime How an annuity and an account-based pension can ease income worries

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Cost-of-living increases The tribes that bore the brunt of increased costs

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Household budgeting made easier Use our budget planner to track where your money is going

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Get set for these price rises in 2019 The Australia Institute senior economist Matt Grudnoff assesses 2018 and the outlook for 2019

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Making your super go further • AMP chief economist Shane Oliver reveals the challenges for Affluent tribes

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• Per Capita’s Myfan Jordan pinpoints the key concerns for Constrained tribes

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• Benevolent Society campaigner Joel Pringle explains the outlook for Cash-Strapped tribes

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Where you can save on household spending 16 Olga Galacho explains how you can make the most of every precious dollar How to supplement your retirement income 18 We share 10 ways you can earn extra cash from home Government update The changes in store in 2019

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Five things you should know about retirement Myths, risks and straight-out untruths: Emmett Wilkinson delivers the good and not-so-good news about life after work.

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e can never know too much about the positives and pitfalls of retirement. Here are five key areas to consider, plus some topics you might want to discuss with a trusted financial adviser.

Two retirement myths 1. The retirement sweetspot The financial community often talks about the retirement sweetspot – the concept of having sufficient financial assets yet still being eligible for an almost full Age Pension.

reduce expenditure in retirement are those who have to. For those who have yet to retire, it would be dangerous to believe either of these retirement myths.

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Retirement is not the time for taking investment risks My father used to say that the best way to make money was not to lose it in the first place. A conservative guy – but the older I get, the more it resonates with me.

For example, a couple who are Ask yourself what’s more both aged 66 and with financial ‘Another retirement important to you when it comes assets of $400,000 plus $40,000 in cash could expect to receive an myth is that retirees spend to investing your savings. Is it preserving and protecting what Age Pension in excess of $30,000 less than when they are you’ve got or is it trying to achieve per year. Using fairly conservative high investment returns and working.’ earnings assumptions, the accepting the volatility? investments can deliver $28,000 per year (indexed to inflation). A common approach for people with Thus, the couple will enjoy a retirement income superannuation income stream accounts is to have of close to $60,000, which is comparable to the two to three years of annual income payments average Australian income after tax. invested in the cash option and to draw down A problem with this model is that to achieve this level of annual payment from the investment pool requires drawing both investment income and capital; and the capital will be exhausted within 18 to 20 years. While that is in line with the statistical life expectancy of a 66-year-old, it represents a risk to anyone living beyond that point. It also doesn’t allow for bequests or unexpected capital expenditure. 2. Retirees spend less Another retirement myth is that retirees spend less than when they are working. This belief is at the core of a recent report from the Grattan Institute, Money in Retirement: more than enough, which argues that the vast majority of Australian retirees are financially comfortable. There are any number of reasons that refute the concept of retirees spending less. This was true of the so-called ‘war generation’, but is anything but true for baby boomers. The only baby boomers who 4

payments from this option. The balance is invested in the chosen investment option/s and is not touched during periods of negative investment returns, assuming these last for less than two to three years! This strategy is often referred to as the ‘bucket approach’ and has supporters and detractors because during periods of good investment returns there is an opportunity cost involved. My opinion? It provides peace of mind to clients and I like it for this reason. Retirement is also not the time to invest in Bitcoin, take up share market options, trading courses or get into property speculation or development for the first time. Going guarantor for property or business loans for the kids can also turn out badly in retirement. There are often no second chances with your retirement funds.

YourLifeChoices Retirement Affordability Index™ December 2018


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Aged care is expensive For many, the retirement journey will lead to a period in residential aged care. Moving into care is expensive for most people. Upfront fees, known as the Refundable Accommodation Deposit (RAD), range between $400,000 to more than $1 million. If you cannot pay in full, you are charged interest on unpaid amounts at the current government rate of 5.96 per cent per annum. There are also ongoing daily care fees that will vary according to the resident’s assessed financial means. Ongoing fees can be as little as $18,490 per year or as high as nearly $60,000 per year in some instances. Dealing with these costs requires major financial decision-making and, for many, these are made in a crisis environment. My advice is to plan early and ensure that Enduring Powers of Attorney are in place. Issues can also arise with wills, so make sure that your will is valid and current.

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The revamped Pension Loans Scheme The Pension Loans Scheme (PLS) is due to undergo major changes from mid-2019, which will broaden its availability. This scheme allows age pensioners to borrow against the value of their home and not make repayments until the property is sold. The unpaid interest accrues and compounds, and will be taken from the proceeds of the home when sold. The PLS is similar to a reverse mortgage, but borrowings can only be taken as fortnightly income payments and not as a lump sum. The proposed changes include making the scheme available to anyone of pension age, whether they receive the Age Pension or not, and increasing the amount that can be borrowed. Previously, full-rate age pensioners could not borrow under the scheme but they will now be able to borrow up to 50 per cent of their annual pension. Higher amounts will apply for part-pensioners and self-funded retirees. The PLS interest rate is currently 5.25 per cent per annum, which is higher than home mortgage rates but lower than typical reverse mortgage schemes. Retirees who are looking to top up their income or who are asset rich but cash poor, may be interested in the scheme. But to do so, they must be prepared to dig into the equity in their home. My experience has been that Aussies in general are sceptical of reverse mortgages. Will having the Government as the provider reduce some of these concerns? YourLifeChoices disclaimer

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And finally: a journey not an event

Retirement is a major life change for most of us and makes us review most aspects of our lives. Try to plan ahead. Any plan has to be based on assumptions and these will always be challenged by reality. It is therefore vital that a review is an integral part of the plan, particularly with regard to finances. You should develop a relationship with a financial adviser who specialises in retirement planning. A good adviser will discuss such things as: • how your super or investments have performed and how they can be expected to perform going forward • is the approach/risk that you are taking still appropriate? • what are your likely expenses over the next 12 months? Can you spend more or should you spend less? • how are you affected by changes to super, tax or social security rules? • have there been any changes in your personal or family situation that will have an effect on your financial situation? DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Emmett Wilkinson is a Certified Financial Planner who specialises in providing advice on aged care and retirement planning at Advisersure Pty Ltd in Melbourne. He has worked as a financial planner for 20 years and previously worked for the Australian Taxation Office and the Reserve Bank of Australia. Advisersure Pty Ltd and Emmett Wilkinson are Authorised Representatives (424041/319614) of MyPlanner Professional Services Pty Ltd AFSL 425542.

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Sponsored message from Challenger

Make your money last a lifetime

A lifetime annuity can be combined with an account-based pension to ease retirement income concerns.

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or anyone who was ever paid fortnightly or monthly, the need to budget to ensure you had enough money to see you through until the next payday was essential. In many ways, a retirement income can be similar, albeit within a much longer timeframe.

Lifetime annuities can help to reduce these concerns. They provide a secure, guaranteed income for life and can form the foundation of your retirement plan. They act as a safety net ensuring you will receive income for life, regardless of how long you live or how investment markets perform.

Research shows that the biggest spending years are at the start of retirement. This is when the newfound freedom that comes with retirement can translate into more travel, home improvements and more time to do the things we have long anticipated.

A lifetime annuity should be seen as one of several income streams you can put in place to help make your overall finances go further to support your lifestyle and changing retirement circumstances.

That can also lead to anxiety about having enough money for the future and can stop us from truly relaxing and enjoying this early stage of retirement. With the average time spent in retirement now exceeding 20 years, income worries can increase as you age. This is shown in the YourLifeChoices’ 2018 Retirement Income and Financial Literacy Survey, where almost half (48 per cent) of the 5064 respondents were concerned their savings would not last in retirement.

‘Remember that choosing an annuity for increased security of income doesn’t mean throwing out the account-based pension option altogether.’ When it comes to weighing up retirement income options, it can seem as if you’re being forced to choose between future income certainty on the one hand, and the potential for better investment returns on the other. By layering an annuity with other retirement income streams, you can achieve the best of both worlds, with enough income certainty to give you peace of mind and a degree of flexibility with your other investments.

The trade-off myth A comparison of lifetime annuities and accountbased pensions is often completed with the aim of choosing one product over the other. As each product has different characteristics, it may be worth considering how these features can help meet your retirement income needs. With account-based pensions, there’s the opportunity to invest your balance according to your risk-return preferences. Based on your riskreturn preference, some investment choices may be linked to market performance. These marketlinked investments offer the possibility for growth. However, if markets become volatile, your retirement savings and income might not last the distance. 6

YourLifeChoices Retirement Affordability Index™ December 2018


Lifetime annuities are protected from market volatility and offer an income that is guaranteed, even if you live longer than expected. Remember that choosing an annuity for increased security of income doesn’t mean throwing out the account-based pension option altogether. A comprehensive retirement portfolio should include a range of strategies to provide a secure income, as well as income invested for growth, in order to take care of the occasional extras and one-off expenses.

Taking care of essentials Lifetime annuities can play an important role in securing a layer of income to meet your essential needs. Together with the Age Pension (if you are eligible), guaranteed income payments from a lifetime annuity can help ensure you have the income you need to cover the essentials, such as household bills, groceries and medical expenses. Income from a lifetime annuity is protected from market volatility and, if you’ve chosen to link your payments to the yearly changes to inflation, it will allow you to continue to afford tomorrow what you can afford today. When you can be certain you have the cash flow to pay for those essential costs indefinitely, you take a lot of the stress out of living – and being retired.

Discretionary spending Once you’ve calculated the cost of meeting those essential needs and securing an income to match, you can explore ways to invest any remaining savings. By selecting a combination of growth and defensive assets, you can develop a second income stream for your discretionary extras – things such as holidays overseas, dining out, upgrading your car and household renovations. While this sort of income stream can add a lot to your quality of life, particularly in the earlier years of retirement when you can expect to be more active, you won’t be relying on these market-linked investments to make ends meet. With a well-planned retirement income strategy, and the right investment solutions to meet your cash flow needs and lifestyle goals, you can have the peace of mind that you’ll be covered for life. To find out more about annuities, speak with your financial adviser, visit www.challenger.com.au or call Challenger on 13 35 66. DISCLAIMER: This article has been sponsored by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670. It is intended to be general information only and not financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters and the information in the product disclosure statement (PDS) for the relevant product (available at www.challenger. com.au) before deciding whether to acquire or continue to hold an annuity. We recommend that prospective investors seek professional advice in relation to their individual circumstances.

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Affluents bear brunt of increased costs

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he biggest price increases in the September quarter were in recreation and transport. Recreation was driven by increases in the prices of holiday travel and accommodation – both international (+4.3 per cent) and domestic (+2.4 per cent). Increased transport costs were driven by rises in the price of automotive fuel (+1.4 per cent). The biggest fall in the quarter was in telecommunications, and this related to a price drop in the cost of telecommunications equipment and services (–1.5 per cent). These changes affected the tribes differently: • Affluent Couples (0.5 per cent) and Singles (0.4 per cent) faced the biggest increases as they tend to spend the most on recreation, i.e. travel and accommodation.

Weekly expenditure for retirees aged 54+ Expenditure items Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure Food & non-alcoholic beverages As a percentage of expenditure Alcoholic beverages & tobacco products As a percentage of expenditure Clothing and footwear As a percentage of expenditure Household furnishings & equipment As a percentage of expenditure Household services & operation As a percentage of expenditure Medical & health care As a percentage of expenditure Transport As a percentage of expenditure Communication As a percentage of expenditure Recreation As a percentage of expenditure Education As a percentage of expenditure Personal care As a percentage of expenditure Miscellaneous goods & services As a percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure 8

Affluent Couples

• Constrained Couples (0.4 per cent) and Singles (0.3 per cent) were more markedly affected by the increased cost of transport. • Cash-Strapped Couples and Singles (both 0.4 per cent) were affected partly by housing and partly by transport, but less so than Constrained tribes because they spend a smaller proportion of their income on transport. Housing costs increased at a slower rate this quarter – partly due to a drop in house prices – but this only trickled through to rents, which still rose 0.2 per cent. Looking at cost-of-living increases over the past year, Constrained Couples were the most affected tribe, and this was due to petrol price increases. Constrained Couples spend the biggest proportion of their income on transport (15 per cent) and petrol prices have risen dramatically in the past year (21 per cent). Unsurprisingly, housing was the main driver of increases for Cash-Strapped Couples and Singles.

Constrained Couples

Couple Couple homeowners homeowners with private on Age income Pension $181.28 $107.14 13% 13% $45.46 $34.14 3% 4% $234.75 $165.34 16% 20% $53.21 $26.29 4% 3% $30.68 $17.42 2% 2% $73.02 $31.68 5% 4% $40.71 $28.80 3% 3% (-1%) $142.86 $101.82 10% 12% $194.33 $126.15 13% 15% $36.97 $26.20 3% 3% $294.01 $99.84 20% 12% $0.58 $0.21 0% 0% $29.14 $17.69 2% 2% $88.51 $47.73 6% 6% $830.46 $1,445.52 +$3.63* +$6.81* $6,263.92 $3,598.66 +$29.49* +$15.73* $75,167.00 $43,183.96 +$353.90* +$188.77*

CashStrapped Couples

Affluent Singles

Couple who rent on Age Pension $202.92 29% $36.04 5% $149.51 21% $42.54 6% $9.21 1% $19.28 3% $15.56 2% $35.26 5% $59.98 9% $28.35 4% $64.92 9% $0 0% $12.29 2% $23.87 3% $699.71 +$3.99* $3,032.09 +$17.32* $36,385.10 +$207.90*

YourLifeChoices Retirement Affordability Index™ December 2018

Constrained Singles

CashStrapped Singles

Single Single Single who homeowner homeowner rents on Age with private on Age Pension income Pension $121.80 $89.90 $159.86 15% 20% 36% $32.88 $29.43 $24.98 4% 6% 6% $117.94 $82.90 $74.29 14% 18% 17% $25.98 $14.69 $19.96 3% 3% 5% $20.41 $8.85 $7.30 2% (-1%) 2% 2% $39.96 $18.55 $14.80 5% 4% 3% $36.73 $20.76 $11.03 4% (-1%) 5% 3% $82.03 $36.32 $21.49 10% 8% 5% $102.94 $52.50 $35.41 12% 11% 8% $35.78 $18.47 $14.41 4% 4% 3% $136.94 $51.51 $31.09 17% (+1%) 11% 7% $0.13 $0.12 $0.01 0% 0% 0% $18.15 $9.58 $8.49 2% 2% 2% $53.72 $26.15 $16.29 7% 6% 4% $825.38 $459.72 $439.41 +$2.93* +$2.13* +$2.04* $3,576.66 $1,992.12 $1,904.09 +$12.70* +$9.25* +$8.84* $42,919.92 $23,905.45 $22,849.11 +$152.35* +$111.01* +$106.06*

*Percentage and dollar changes compared with the June figures


How does your spending compare? Expenditure items

Affluent Couples

Constrained Couples

CashStrapped Couples

Affluent Singles

Constrained Singles

Single Single Couple Couple Couple who homeowner homeowner homeowners homeowners rent on Age with private on Age with private on Age Pension income Pension income Pension

CashStrapped Singles Single who rents on Age Pension

Housing Rent, interest, home repairs and maintenance & body corporate fees As percentage of expenditure Domestic fuel & power Electricity, gas & oil As percentage of expenditure Food & non-alcoholic beverages Includes meals in restaurants As percentage of expenditure Alcoholic beverages & tobacco products Alcohol consumed at licensed premises As percentage of expenditure Clothing and footwear Dry cleaning, repairs & alterations As percentage of expenditure Household furnishings & equipment Outdoor furniture, floor and window coverings, linen and bedding, appliances, glassware, tableware and cutlery, tools & mobile phones As percentage of expenditure Household services & operation Cleaning and garden products, phone charges (including mobile), pest control & home cleaning services As percentage of expenditure Medical & health care Health insurance, doctor and dental fees, medicines and pharmaceutical products, prescriptions & hospital and nursing home charges As percentage of expenditure Transport Purchase, maintenance and insurance of vehicles, fuel & public transport fares As percentage of expenditure Communication Spending on telephone (including fixed line and mobile) Spending in internet services As percentage of expenditure Recreation AV equipment including TVs and pay TV, books, newspapers and magazines, camping and fishing equipment, sports equipment, internet charges, holidays & animal expenses As percentage of expenditure Education Primary and Secondary school fees (including school sport fees) TAFE and University fees (including HELP) Fees to all other private education institutions As percentage of expenditure Personal care Toiletries, cosmetics & hairdressing As percentage of expenditure Miscellaneous goods & services Stationery, watches and jewellery, interest payments on credit cards and all loans (excluding home loans), education, rates and charges on investment properties, accountant and tax fees & cash gifts As percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure

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Price rises that have hurt most and what’s ahead in 2019 The Australia Institute senior economist Matt Grudnoff has his finger on the pulse of cost-of-living increases. He reviews 2018 and forecasts the key changes to expect in 2019.

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t has been a strange year for cost-of-living rises and falls, with the subject dominating the political conversation at a time when inflation has been very low.

increased by 11 per cent. Those increases, at a time of stagnant real wages, had such a big impact that we’re still talking about it today.

It’s been a timely reminder that price increases are only half of the cost-of-living puzzle. The other half is incomes.

So, if not electricity prices, what were the big price movers? Price rises were dominated by the increase in petrol prices. Automotive fuel (which is mainly petrol and diesel) increased 21 per cent – almost twice as much as electricity did two years ago.

People notice the difference between how fast their incomes are rising and how fast prices are increasing. While inflation has been low, the Consumer Price Electricity prices are Index (CPI), which measures price rises for the average household, probably the hardest to has increased by only 1.9 per cent predict. This is because over the past 12 months. Average wages have increased by almost the problem is largely the same amount. Low price rises and low wages growth have meant that indexed increases in the Age Pension have also been small.

linked to a lack of clear policy on greenhouse gas emissions.

This means that real incomes – the increase in income minus the increases in inflation – haven’t moved much at all. It is those stagnant real wages that are putting pressure on household budgets and that have, in turn, focused attention on the price of everything. Over the past year, most of the focus around cost of living has been on electricity prices. The political class has talked about it endlessly and it has consumed plenty of space in newspapers and on radio and television. The interesting thing about the past 12 months is that electricity prices have increased at about the same rate as the CPI – 1.8 per cent for electricity versus 1.9 per cent for the CPI. Yes, you read that correctly. Electricity prices haven’t increased much over the past year. This is mainly because the big price increases occurred more than 12 months ago. Two years ago, electricity prices 10

Other big movers in the past 12 months were domestic holiday travel and accommodation, which have increased 7.4 per cent. International travel and accommodation increased only by 1.4 per cent.

There were also big increases in the price of fruit and vegetables. Fruit was up 6.1 per cent and vegetables 4.1 per cent. This is in part due to the drought conditions throughout large parts of Australia. Tobacco also continued to increase significantly (14 per cent), mainly because of taxes. Insurance rose by 4.2 per cent. However, not all prices went up. Some prices fell, offsetting the pain of price rises. The biggest falls came in audio, visual and computing equipment, which fell by 9 per cent. Communication, such as mobile phone and internet charges, fell in price by 4.3 per cent. Another big drop came from household textiles, which fell 7.7 per cent. Housing has been an interesting phenomenon over the past 12 months. Not because it has been a major mover either up or down, but because it has been surprisingly flat. Housing increased just 1.6 per cent and most of that was in the last three months of 2017. After being such a driver of cost-of-living pressures, it has been quiet since house prices have cooled. While the flow-on effects to things such as

YourLifeChoices Retirement Affordability Index™ December 2018


rent take time, if house prices remain flat through 2019, we may see lower rental increases that will help the Cash-Strapped tribes. What’s in store for us in 2019? They say economic forecasters exist to make astrologers look good. So everything I’m saying now should be taken with a lot of healthy scepticism. But here are some things to think about. House prices are likely to continue to be fairly flat after the crazy increases of previous years. If this is the case, then housing costs are also likely to be flat. Petrol prices will continue to be driven by two things that Australia has limited influence over, namely, the oil price and the exchange rate. Oddly, the biggest influence on both is likely to be the trade war between the US and China. If tensions ease, then petrol prices are likely to stabilise and perhaps decrease. If the trade war gets worse, then expect oil prices to go up and the exchange rate to fall. This will be a double whammy for motorists. Electricity prices are probably the hardest to predict. This is because the problem is largely linked to a lack of clear policy on greenhouse gas emissions. As our ageing coal-fired power stations come to the end of their lives, investors need certainty to sink money into their replacements and the chaos at the federal level is simply not providing that. YourLifeChoices disclaimer

If the political class does sort out action on emissions, then electricity prices could actually fall as new generation supplies come on line and force down wholesale electricity prices. If the mess continues and there is no real action on emissions, then investors will stay away. The coal-fired power stations will become increasingly unreliable and the lack of competition in electricity generation will keep prices high. The likelihood of an El Niño weather event in 2019 is high. This will mean drought conditions are likely to persist. Coupled with rising temperatures, food production will be affected and have an impact on staple foods such as fruit, vegetables and meat. It’s an election year, so expect much talk. But as long as income growth, including increases in the Age Pension, continues to just keep up with price increases, people will still feel financial pressure. The Government has little control over most price increases, but the inability of workers to demand and get higher wages is a problem with which it will have to grapple, irrespective of which party is in power after the next Federal Election. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

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What you need to know about 2019

The outlook for Aff luent retirement tribes

Dr Shane Oliver, chief economist and head of investment strategy and economics at AMP Capital, says there are challenges ahead.

Affluent Couples and Singles • Homeowners with private income • Estimated annual expenditure $75,167 and $42,919 respectively

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s in 2018, this year is likely to present some challenges for Affluent Couples and Singles in managing their finances. Putting aside healthcare costs, which will continue to rise at a four to five per cent annual rate, there are five big areas to keep an eye on.

Housing For those in Melbourne and Sydney, home prices are likely to remain under downwards pressure as tight credit conditions, rising supply, reduced foreign buying and possible tax changes continue to have an impact. Of course, this is a feel-bad factor for owners, but it is not really a problem unless you have to sell. A consolation is that home prices had reached levels we never imagined in the first place. And outside Sydney and Melbourne, house prices should perform better.

Interest rates Official interest rates are likely to stay depressingly low. They may even fall a little if the drop in house prices weakens consumer spending and there is an even longer period of low inflation. So, yet again, it will be difficult for retirees to rely on income from bank deposits and it could get even harder.

Exchange rates With interest rates on hold and maybe even falling at a time when US interest rates are still rising, albeit 12

more slowly than in 2018, the Australian dollar is likely to fall further. This, in turn, is likely to put more upwards pressure on the cost of overseas travel. Perhaps not dramatically (say by five per cent or so) and it will vary by destination – with the biggest risk being for US holidays, as the Australian dollar is unlikely to change much against the Japanese Yen and the Euro. That, of course, provides an opportunity to target holidays to destinations where the Aussie dollar is holding up better – such as Europe and Japan.

Your shares The share market should, hopefully, see a slight improvement after the messy ride of 2018 as profits continue to rise and interest rates remain low. The key here is to maintain a well-diversified portfolio of shares offering solid, sustainable dividends.

Taxation And the final category is tax. A key event in 2019 will be the Federal Election, which may well result in a change of government. Labor’s tax policies – particularly in relation to franking credits, negative gearing and the capital gains tax – could have a significant impact on the finances of self-funded retirees. These are the likely financial challenges for 2019. The good news, though, is that with inflation likely to remain low, price increases will remain modest for clothes, technology-based goods, household goods and services, motor vehicles and most types of recreation. The keys to managing the financial challenges of 2019 for Affluent tribes will be to have a welldiversified portfolio of investments providing decent cash flow, to choose holiday destinations where the Australian dollar remains relatively strong, and to seek advice regarding the impact on your finances of any tax adjustments that may occur from a change of government.

YourLifeChoices Retirement Affordability Index™ December 2018

YourLifeChoices disclaimer


The outlook for Constrained retirement tribes Myfan Jordan, social innovation director at Per Capita Australia, predicts the pressure points in 2019. Food While cost-of-living pressures continue to affect household expenditure, for older people – known to prioritise bill paying and to avoid hardship programs and grants that are offered to energy consumers – food is often the trade-off.

Constrained Couples and Singles • Homeowners on full or part Age Pension • Estimated annual expenditure $43,184 and $23,905 respectively

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he areas of expenditure that will have the biggest effect on the finances of Constrained Couples and Singles in 2019 fall into seven key areas.

Energy costs With bipartisan agreement on energy policy fading into the distance, the volatility of energy costs will be a key concern. Although age pensioners and part-pensioners may be eligible for some state or territory-based energy concessions, many are faced with bleak choices to either heat or eat in winter; and buy groceries or run cooling systems in the hotter months.

Approximately 12 per cent of people using foodbanks are over 65 years of age. (Foodbank Hunger Report 2017). Food insecurity has been shown to negatively affect both physical and mental health. While some food costs are relatively stable, the price of fresh and more nutritious foods can increase due to extreme weather conditions, and it is likely that the more extreme effects of climate change will continue to push up prices. It is no wonder there is strong emerging evidence of malnourishment among older Australians who cannot afford healthy diets. >>

‘The cost of home internet is significant for all people on fixed incomes.’ Even pensioners who own their homes can be vulnerable. Many older properties lack adequate insulation, meaning the costs of staying warm and keeping cool will be much higher. Older people may also experience a ‘loyalty penalty’, sticking with a known energy provider rather than shopping around on comparison sites for the best deal. Some energy companies have been found to charge long-term customers higher prices. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2018

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Climate change A University of Sydney report released in November describes climate change as a health issue. Increases in temperature, and particularly heatwaves, pose a considerable health risk for older people, who are more likely to be living with one or more chronic conditions, and for people with disability. In Victoria, for example, the heatwaves of 2009 and 2014 were linked to the deaths of 374 and 167 people respectively – a rise of more than 46 per cent in the 65 to 74-year age group alone. In total, the 2009 heatwave, which also affected South Australia, killed 432 people. That is two and a half times the number of people killed in the Black Saturday bushfires. In the absence of affordable air-conditioning, the power costs of older Australians are likely to put their health at risk during extremely hot weather.

Housing With the property market cooling and predictions that home loan interest rate may rise in 2019, some older people with mortgages may find their homes are worth less than the amount they borrowed.

Health expenses Out-of-pocket health expenses can be a major cost for older people and represent a significant portion of a fixed income. The Commonwealth Seniors’ Healthcare Card (CSHC) provides low-income Australians with significant discounts on healthcare costs. The card is means-tested by income, and thresholds are indexed annually, most recently rising in September 2018. You can check your eligibility here. 14

Despite the availability of the CSHC to most Australian pensioners, gap payments for prescriptions, specialists and other medical expenses not covered by Medicare can be significant.

Transport Staying connected is particularly important to older people, because they are more at risk of social isolation and loneliness. For this reason, transport is a critical enabler and the associated costs are often a barrier. Hikes in petrol prices over the past five years have been significant. Even though there has been a drop in the last quarter, rises next year should be expected. For older people living in rural areas, who are often more reliant on their cars, petrol prices are often higher than in the city. More than 50 per cent of people in rural areas are aged over 50 and the numbers are growing. Public transport costs can also be a barrier to accessing services and to social participation.

Technology costs The cost of home internet is significant for all people on fixed incomes. The cost of upgrading computers, mobile phones and so on are high, but these technologies are recognised as increasingly critical for accessing government and other services. Pensioners on low, fixed incomes are often excluded from choice in the provision of services, meaning that market competition doesn’t always provide the lower costs we are promised. * Per Capita is an independent, progressive think tank, dedicated to fighting inequality in Australia. It works to create a vision for Australia based on fairness, shared prosperity, community and social justice.

YourLifeChoices Retirement Affordability Index™ December 2018

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The outlook for Cash-Strapped retirement tribes There is little relief in sight for age pensioners who rent, says Joel Pringle, advocacy campaigner at The Benevolent Society. the community, around 46 per cent. That rate crashes to 16 per cent for pensioners who rent (Cash-Strapped tribes).

Cash-Strapped Couples and Singles •R  enters on an Age Pension •E  stimated annual expenditure $36,385 and $22,849 respectively

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n 2016, The Benevolent Society partnered with think tank Per Capita and The Longevity Innovation Hub to look at the experiences of Australians living on the Age Pension. The report, Adequacy of the Age Pension in Australia, comprehensively showed that relying on the pension while renting privately is the biggest indicator of poverty among older Australians. That report played a major role in the Fix Pension Poverty campaign, which has repeatedly emphasised that the quickest and simplest way to address poverty among older people is an immediate increase in Rent Assistance – a 50 per cent rise for single people and 30 per cent for couples. Ongoing costs for homeowners, such as rates, insurance and maintenance, can also prove difficult for those on low incomes. The inequality of access to council rate discounts or exemptions for people on the Age Pension (or others on low incomes) is a major issue in certain regions. The capacity of councils to provide financial relief in areas of disadvantage requires serious attention. The Adequacy of the Age Pension report showed a massive difference not only in the additional costs faced by renters, but also in underspending on other areas of essential goods and services. For example, pensioners who own their homes have private health insurance at similar rates to the rest of

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Older renters spend less on healthcare than their home-owning peers. This is also true for insurance, utilities, vehicle fuel and food. The evidence is that food is the first item of essential expenditure to be cut in order to cope with inadequate incomes. This reinforces the view that being stuck in private rental accommodation while on a low income affects people’s entire wellbeing, including health and safety. Looking forward to 2019, the much-talked-about housing downturn has seen rents decrease in Sydney and the central suburbs of other major cities – in other words, the places with the highest rental costs. Rents in many other suburbs and regional areas, where more affordable dwellings are typically found, continue to rise modestly. While some relief will be felt by those with the highest rent, it is unlikely to increase the availability of affordable private rental properties for people relying on the Age Pension. Being in private rental accommodation will still be the biggest cause of financial distress for older Australians. The incomes of the Cash-Strapped tribes are inadequate. As the cohort in their age group with the lowest savings, the gap between their income and the cost of living is made up by debt and poverty. The Benevolent Society urges you to seek out the services and supports available and ensure you are receiving them, for example rebates for supplies for diabetes or incontinence and energy rebates or lowincome support from telecommunications providers, and seek out local not-for-profit financial counselling services and programs such as MoneyMinded. * The Benevolent Society is a not-for-profit, non-religious charity committed to seeking a just society where all Australians can live their best life.

YourLifeChoices Retirement Affordability Index™ December 2018

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Where you can save on household spending Inflation may be low, but there are still regular price rises in everyday goods and services. Olga Galacho shows how you can make the most of every dollar.

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conomists may consider we are living with low inflation at the moment, but the fact is that many older Australians are struggling with price increases. The latest Consumer Price Index figures show that inflation was just 1.9 per cent in the 12 months to September, according to the Australian Bureau of Statistics (ABS). That figure is an average of the price increases and decreases of a ‘basket of goods and services’. Included in that basket is childcare, and a fall in its cost last year helped to bring the average inflation rate down. Naturally, retirees do not need to pay for childcare so that rate isn’t completely relevant to older Australians.

If you are lucky enough to live near a Costco – there are 11 of them around Australia, with another planned for Perth – you can expect substantial savings on a huge array of products, from fresh and frozen foods to diamonds and hearing aids, as this chain offers wholesale prices. There is an annual fee of $60.

As with death and taxes, another of life’s inescapable certainties is that there will be an increase in the cost of private health insurance every April.

When goods and services are taken individually, some of the hikes will most certainly be hurting retirees’ wallets. Among the biggest rises were for health (3.2 per cent) and transport (six per cent) costs, but food and non-alcoholic beverage prices also rose, albeit at a more modest 1.6 per cent. In YourLifeChoices’ Retirement Affordability Index September 2018 edition, The Australia Institute estimated that across all tribes, retiree couples spent an average $9360 a year on food and nonalcoholic beverages. A 1.6 per cent hike on that amount equals about $150, which is more than just loose change. Here are some tips on how you can stretch your dollar further.

1. Groceries For those aiming to reduce their weekly grocery bill, there are many ways to save at the supermarket. If you haven’t used discount codes, coupons and vouchers to make online purchases, you are missing out on potentially hundreds of dollars of savings a year. 16

The discounts are easy to find with a simple Google search. I looked up Catch.com.au and found many household items marked lower than shelf prices at supermarkets.

The Thrifty Issue site is full of saving strategies on grocery bills. Not only does it detail how to access discount codes, it also sells a book full of discounts for less than $5. The 2019 version can be ordered now.

If you enjoy eating out but find the cost prohibitive, don’t forget to check out the cafés and restaurants that offer discounts to older Australians with a Seniors Card. Scan the directory of outlets in your state or territory (Victoria, NSW, ACT, South Australia, Western Australia, Tasmania, Queensland, Northern Territory) to discover where savings are offered.

2. Health As with death and taxes, another of life’s inescapable certainties is that there will be an increase in the cost of private health insurance every April. The cost of private health cover has risen 54 per cent since 2009, making it one of the most expensive items in Australian household budgets. Each year, the hike is many multiples of inflation, but in 2018 the increase was pared back slightly to 3.9 per cent. This helped to contribute to an overall annual rise in healthcare-related costs of 3.2 per cent.

YourLifeChoices Retirement Affordability Index™ December 2018


If you want to shop around for cheaper health insurance that meets your needs, a good starting point is to visit the Private Health Insurance Ombudsman’s comparison site and complete a quick questionnaire. The site will enable you to compare your current policy with others.

There are several websites and phone apps to steer you to cheaper fuel outlets. If you live in Victoria, check out the RACV fuel prices tool. It is essentially a map highlighting the prices advertised at different petrol stations. It also offers the average price and a recommended price above which you should not pay.

The site generates a list of the health funds that match your answers and the monthly premium before the government rebate. You can do the questionnaire as often as you like and vary your answers in order to flush out suggestions that match your needs.

For links to motoring groups in other states and territories, visit the Australian Automobile Association.

But be wary of comparison sites that have vested interests in promoting certain health funds over others because of the commissions they earn. For instance, iSelect.com.au, lists its partners as being the major providers, but omits two of the largest health insurers. Also, be mindful that some newer policies have dropped a few of the legacy benefits of earlier ones. And check the terms and conditions carefully before changing policies – buyer beware indeed.

3. Transport You don’t have to wait until you retire to be eligible for public transport concessions. So if you have already turned 60 and are working less than 35 hours, you are most likely entitled to a Seniors Card, which allows you to commute for much less than a full fare. Check out the criteria in your state. For those times when you need your own wheels, buying the cheapest fuel is a no-brainer. The Australian Competition and Consumer Commission said petrol pump prices jumped 10 per cent in the 2018 financial year. YourLifeChoices disclaimer

If you are on the go, sometimes an app on your phone might be easier to look up. Among the popular and free fuel apps are petrolspy and fuelmap.

4. Travel According to the ABS, one of the biggest price rises that hit retirees hard in the September quarter was the cost of overseas travel. The September quarter coincides with the peak summer season in Europe and America, making travel more expensive to those continents. For the best shot at reducing your holiday costs, make sure to read YourLifeChoices travel articles on Saturdays and keep an eye out for more deals on the Skyscanner website. Another factor making international travel costlier at the moment is the subdued Australian currency. However, there are many countries in Asia where our dollar can still deliver reasonable bang for your buck. Finally, while everyone hates to buy travel insurance, it would be unwise to skimp on it just to save money. The good news is that there are several organisations offering cheaper premiums to travelling seniors. Compare policies with Australian Seniors Insurance Agency, COTA, AIG Australia or APIA for the most appropriate cover.

YourLifeChoices Retirement Affordability Index™ December 2018

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Creative ways to earn some extra cash When money gets tight, it’s time to get creative. Here are 10 ways you can make some extra cash from home.

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n YourLifeChoices’ 2018 Retirement Matters Survey, 5190 respondents revealed how they stretch their retirement income. They said they take fewer or no holidays, did not dine out or buy takeaway food, shopped only at discount stores, went only to doctors who bulk billed, did not go to the dentist and didn’t use heating or cooling.

$3.6 billion in reverse mortgages to create a cash flow to fund their needs.

They’re tough strategies for challenging situations. But rather than cutting back, how can older Australians make money to supplement their income? Here are some simple ways to earn a little extra cash – and maybe have some fun at the same time. Just remember that anyone on an Age Pension needs to be aware that extra income may result in a reduced pension.

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If you are able to pay to store your furniture and personal effects, then house-sitting can be an interesting way to make extra money. Be warned that storage can cost between $116 and $2000 a month, according to spacer.com.au, so do your homework and assess whether you’ll come out on top.

Consider these sites, which generally require a paidup membership: • happyhousesitters.com.au • aussiehousesitters.com.au • mindahome.com.au • housecarers.com.au • trustedhousesitters.com You can nominate the areas you’re happy to move to, and the times, but the reality is that you are at the mercy of the market and will need to be flexible.

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Tap into the value of the family home Option A: A reverse mortgage Deloitte’s 2015 Reverse Mortgage Report estimated that Australian retirees had amassed $500 billion in home equity. About 40,000 had taken out around

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While interest is charged, neither that nor the principal amount borrowed needs to be repaid while you (and whoever else is named on the home’s title) live in the property. Option B: Home reversion scheme Under a home reversion scheme, you sell a portion of your property to a lender for cash. But this option is limited to just one provider, Homesafe Wealth Release, which offers the Bendigo Bank-backed scheme only in parts of Sydney and Melbourne where home prices are unusually high.

House-sit

If the sums work for you and you’re interested in moving around the city, state or country – or even heading overseas – then house-sitting is an option.

The typical reverse mortgage was for around $92,000 and the average age of the borrower was 75. These types of mortgages, which are available only to those aged 65 and over, are a loan against your home with proceeds able to be taken as a lump sum, income stream or line of credit.

No repayments are expected under the scheme. Instead, your lender buys a proportion of your property and becomes a joint owner. Another option is the revamped Pension Loans Scheme, which is due to undergo major changes from mid-2019. This scheme allows age pensioners to borrow against the value of their home and not make repayments until the property is sold. Option C: Building on your property If you have sufficient land, it may seem attractive to subdivide and build a second residence to sell. The potential problems? You need a big back yard, and you have to construct a driveway through to the second home. Beware that council planning requirements can be expensive and Age Pension entitlements might be affected.

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After school care Most schools run before and after school care programs for parents who can’t drop off or pick up their children to fit in with regular school hours. After-school-care programs regularly seek people who are experienced with children and have time to spare. You’ll need a Working with Children Check.

YourLifeChoices Retirement Affordability Index™ December 2018


Well-known platforms include Uber, UberEats and Deliveroo, but also consider caravan sharing business Camplify; pet-sitting site Mad Paws; Spacer, a platform that rents out any available space you may have for storage and car parking; Car Next Door, a peer-to-peer car sharing service; ToolMates, a platform for tool and equipment sharing, and Airtasker, which is an option for cleaning, admin work and all sorts of odd jobs.

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Take in a boarder or rent a room If you can clear out a spare room and don’t mind some company, consider a boarder. This may be an overseas student, although that would require you to provide a certain number of meals every day, which can tie you down. You could advertise for a boarder or go through an agency, including Airbnb.

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Become a salesperson

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Dog walking Walking is a great way to stay fit and active, and walking with a dog or dogs can be fun. Start with just one dog and progress to more if you feel comfortable. If you’re asked to walk big dogs, ensure the owners provide you with a leash system that lets you stay in control.

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Sell, sell, sell Are there items hidden away in your attic or garage that have not seen daylight for years? Then get rid of them on such sites as eBay and Gumtree.

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Many older items might now be back in fashion – who regrets getting rid of all those EPs and LPs decades ago? Popular items include: vintage suitcases, storage trunks, jewellery, comic books, sports memorabilia, typewriters, bags (especially leather satchels), wooden beds and non-digital cameras.

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Restore furniture In our time-poor society, furniture tends to be junked rather than restored and loved all over again. Many councils have bulk rubbish collection weeks and these can provide a treasure trove of items that you can restore at your leisure and sell once completed. Start small and maybe do a course in furniture restoration. Some community centres and Men’s Sheds offer guidance in that area.

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Discover the gig economy Research shows that one in 10 Australians is taking advantage of the gig or sharing economy, including many retirees who use it to supplement their income. YourLifeChoices disclaimer

YourLifeChoices member Catsahoy says: “I became an Avon lady at 49; now at 74, I still sell. As with delivering junk mail, it gets me out of the house, plus we have meetings every couple of months, so I get to meet new people all the time. I have had to cut down on the number of customers I had as the walking was getting too much, but it’s a good way to earn a bit of pocket money. The trouble is that I’ve become my own best customer. And since they started selling kids’ clothes and toys, I buy for the grandchildren as well.”

Online surveys and market research Many companies will pay you to complete surveys online. It won’t make you rich, but it all helps. You could also sign up to take part in market research or to participate in a focus group. Just Google ‘focus groups’ to get started. Also consider supervising exams or assisting at a polling booth. YourLifeChoices member Jurassicgeek offered this feedback: “I was doing this [surveys] for about eight months and I finally had done enough to get a payment – $47.88! As per the rules, I declared it as income to Centrelink (I’m an Age Pensioner). The way they carried on was as if I had made a million dollars. I was immediately placed on fortnightly reporting and they wanted to know how much I made every fortnight! It was $47 in eight months! I was called in for an appointment because my ‘circumstances had changed’.” DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

YourLifeChoices Retirement Affordability Index™ December 2018

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Government update YourLifeChoices keeps you up to date with retirement income changes. New Aged Pension reporting rule Australians who are aged over 80 and live overseas will need to produce a “proof of life certificate” to continue receiving the Age Pension in a tightening of rules that start from 1 July. They will need to go to an Australian embassy or consulate every two years to register that they are still alive and entitled to continue receiving payments.

Aged Care royal commission The Royal Commission into Aged Care Quality and Safety gets under way on 18 January in Adelaide, with QC Richard Tracey and former Medicare chief executive Lynelle Briggs appointed as Royal Commissioners. Other public hearings will be held around Australia on dates to be announced. The inquiry will look at: • the quality of care provided to older Australians and the extent of substandard care • the challenge of supporting the increasing number of Australians suffering dementia. Anyone with concerns about the quality and safety of aged care can contact the Aged Care Complaints Commissioner on 1800 550 552 or lodge a complaint online.

Revamped Pension Loans Scheme The Pension Loans Scheme (PLS) will undergo major changes from mid-2019 to broaden its availability. The scheme allows age pensioners to borrow against the value of their home and not make repayments until the property is sold. Unpaid interest will accrue and compound and be taken from the proceeds of the home when sold. The proposed changes include making the scheme available to anyone of pension age, whether they receive the Age Pension or not, and increasing the amount that can be borrowed. Also, new means testing rules will apply from 1 July for pooled lifetime retirement income stream products bought on or after that date and the Work Bonus will be increased to $300 per fortnight (up from $250 per fortnight). It will also be extended to the self-employed for the first time. Both measures are subject to the passage of legislation.

Beware the scammers If you’ve given personal information to a scammer, call the Scams and Identity Theft Helpdesk at the Department of Human Services (DHS). 20

The DHS warns about the following scams: • An email and SMS scam claiming to be from Medicare, telling people they are owed a rebate of more than $200. The scammers encourage people to click a link to a website and share their personal details. • An Age Pension calculator scam is circulating on social media with a link to a pension calculator. If you use the calculator, the scammers charge a fee to your mobile phone account without your permission.

Age Pension rates The current Age Pension rates will be adjusted from 19 March in the first of the twice-yearly indexations. Since 20 September 2018, the following payment rates have applied: Maximum Age Pension payment rates Single base Supplement Energy supplement Total

Previous $826.20 $67.30 $14.10 $907.60

Current $834.40 $67.80 $14.10 $916.30

Increase $8.20 $0.50

Couple (each) Base Supplement Energy supplement Total

$622.80 $50.70 $10.60 $684.10

$629.00 $51.10 $10.60 $690.70

$6.20 $0.40

$8.70

$6.60

The maximum fortnightly payment for the Pension Supplement is $67.80 for singles and $51.10 each (or $102.20 combined) when part of a couple. The maximum fortnightly payment for the Energy Supplement is $14.10 for singles, and $10.60 each (or $21.20 combined) for couples. The Age Pension age will increase to 66 years from 1 July 2019.

YourLifeChoices Retirement Affordability Index™ December 2018

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