Retirement Affordability Index February 2021 – The true cost of retirement

ISSUE 16 FEBRUARY 2021

Retirement Affordability Index

™

Retirement costs – the real story

Why you probably need more than you think for a ‘comfortable’ retirement, where the system fails and where it flies. www.yourlifechoices.com.au

It’s difficult to be confident in uncertain times.

With less certainty in the world’s financial markets, making sure your money goes the distance is more important than ever.

Take a look at your retirement income with fresh eyes and download Challenger’s Guide to Income in Retirement today.

Visit challenger.com.au/incomeguide to get your guide.

Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger Guaranteed Annuity (Liquid Lifetime). This information has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Challenger Guaranteed Annuity (Liquid Lifetime) Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the annuity. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au. All references to guaranteed payments refer to the payments Challenger promises to pay under the relevant policy documents. Neither the Challenger group of companies nor any company within the Challenger group guarantees the performance of Challenger’s obligations or assumes any obligations in respect of products issued, or guarantees given, by Challenger.

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Contents

Published by: YourLifeChoices Pty Ltd Publisher: Leon Della Bosca Editor: Janelle Ward Copy Editor: Dairne John Writers: Jeremy Cooper, Matt Grudnoff, David Knox, Brendan Ryan, Noel Whittaker, Janelle Ward Cover Design: Leon Della Bosca Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9081 9997 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: YourLifeChoices Pty Ltd 2021

Figures show the true cost of retirement Australia Institute senior economist Matt Grudnoff explains the value of this index

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Who’d be a smoker?

December quarter cost of living figures show who was most affected by price rises and falls

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Budget your way to confidence Use our budget planner to get your finances in order

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What’s wrong with our retirement income system?

It’s ‘opaque and uncertain for almost all retirees’, says actuary Dr David Knox

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Age Pension payments in 2021 Challenger’s chairman of retirement income Jeremy Cooper tells what smart retirees do at least every year.

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Many nest eggs are too small Dr Ummul Ruthbah says too many of us underestimate the cost of a ‘comfortable’ retirement

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What our surveys told us about you Your confidence in retirement, your estimates on costs

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How much do you need to retire?

Noel Whittaker tells how to work out what you need before pressing the retirement switch.

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Services and rebates that can help you Financial adviser Brendan Ryan lists the many services set up to help retirees

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Government update Support payments, superannuation changes, Age Pension updates and more

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YourLifeChoices Retirement Affordability Index™ February 2021

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How we’re helping all sectors understand the true cost of retirement Widely used industry standards fail to show how retirement affects different groups. The Australia Institute senior economist Matt Grudnoff explains why the Retirement Affordability Index™ is such a valuable resource.

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he Australian government spends billions on boosting retirement incomes. The two biggest costs, the Age Pension and superannuation tax concessions, are expected to total $95 billion this year. That’s more than it will spend on health.

For that kind of money, you might expect that retired people in Australia are doing very well. But a quick look at the 36 OECD (Organisation for Economic Cooperation and Development) nations shows that Australia has the fourth highest rates of poverty in retirement.

Australia’s retirement income system is flawed.

This is because much of the help boosting retirement incomes goes to those who do not need government support and not enough goes to those who really need it. While spending on the Age Pension ($54 billion) is well targeted, more than half of super tax concessions ($41 billion) goes to those who do not need income support in retirement.

To highlight the shortcomings of the system and the difficulties faced by key retiree cohorts, YourLifeChoices and The Australia Institute teamed up in 2017 to take a closer look at how different groups of retirees were coping financially in retirement.

There was a serious lack of information regarding this issue, which has contributed to it being overlooked in the public policy arena. The aim was four years ago as it is now – to provide more accurate information to shape policy, planning and expectations. Our figures show the true cost of retirement.

This work has uncovered the fault lines in retirement incomes and has shown who is doing well and who is struggling. An important fault line is housing, with those who don’t own their home in retirement facing much greater cost of living pressures. This has important policy implications for government. But before we go any further, let’s look at our six cohorts.

We split retired people (i.e. those aged 54 and over living in households where no one is in the workforce) in three ways.

First, we split them into two groups by their main source of income.

The first group is those retirees who derive most of their income from government pensions and allowances, including the Age Pension.

The second group derives most income from private investments, including superannuation. If a couple has some superannuation earnings but gets more from the Age Pension, then they would be categorised as getting their main source of income from pensions and allowances. Similarly, those who get most of their income from investments but still draw a part pension are classified as getting their main source of income from private sources.

Rather than look at all retired people as one homogenous group, we break them into six cohorts to gain a more nuanced view of how each is coping financially. This allows us to look at the inequality that is inherent in the retirement income system.

The study, released as the Retirement Affordability Index™ and updated each quarter, allows a more detailed examination of how different cohorts are spending their money and how the cost of living affects each group.

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YourLifeChoices Retirement Affordability Index™ February 2021

Then, we split the groups into couple and single households.

Finally, we split the groups by their housing tenure – those who own their home (either outright or with a mortgage) and those who rent, either privately or publicly.

This would give us eight groups of retirees. However, we removed two of the groups because they represent such a small portion of the population and we cannot obtain reliable data for them. The two groups excluded are couples and singles who rent and get most of their income from private sources.

Those who have significant investments, including superannuation, almost always own their home.

Given that the main residence is exempt from the Age Pension asset test, this is a further encouragement for retirees with significant wealth to invest in their own home. The result is that there are very few retirees with significant investment assets who choose to rent. This is not to say that there are no retirees in this category, only that the numbers are so small that we can’t obtain reliable figures on them.

This leaves us with six cohorts. They are: • couples who earn most of their income from the Age Pension and own their home (constrained couples) • singles who earn most of their income from the Age Pension and own their home (constrained singles) • couples who earn most of the income from the Age Pension and rent (cash-strapped couples) • singles who earn most of their income from the Age Pension and rent (cash-strapped singles) • couples who earn most of their income from private investments and own their home (well-off couples) • singles who earn most of their income from private investments and own their home (well-off singles) We use data from the Australian Bureau of Statistics (ABS) Household Expenditure Survey, which shows how Australians spend their money. It places spending into 12 broad expenditure categories (see page 6). From this, we can see how much the average household in each of the six cohorts spends in each category.

This gives us valuable insights into the problems of poverty in retirement. For example, those who rent spend substantially more of their income on housing.

Most retirees who own their home do so outright and spending on housing is mainly on maintenance and various government taxes such as rates.

This means that those who rent in retirement face much tougher spending decisions. Retired renters spend, on average, 34 per cent of their income on housing, while those who own their home spend only about 14 per cent.

Spending almost two and half times as much on housing means that retired renters need to cut back

in other areas, with recreation and transport most affected. The average retired homeowner spends about 30 per cent on recreation and transport, while the average retired renter spends only 16 per cent.

As a result, retired renters have fewer opportunities to get out and interact with other people. Retirement for some people can be a lonely and isolating time and being a renter in retirement increases that likelihood because of reduced financial circumstances.

The other area in which retired renters cut back is healthcare. While the average retired homeowner spends 10 per cent on healthcare, the average retired renter spends five per cent on healthcare. It is very concerning if retired renters are unable to afford medication or are putting off seeing health professionals.

While renters incur significantly higher housing costs, they also face higher cost of living increases.

In the figure below, we compare price increases for our six different cohorts since 2001.

The two renting cohorts (cash-strapped couples and singles) faced the highest price increases.

Homeowners who derive most of their income from private sources (well-off couples and singles) faced the lowest cost of living increases. Pensioners who own their home (constrained couples and singles) are between those two groups.

Over time, retired renters will see their purchasing power (the amount of goods and services they can buy) shrink compared with retired homeowners.

With housing affordability getting worse over time, the inequality among retirees can be expected to increase rather than diminish.

The Retirement Affordability Index™ is a valuable resource not only for retirees and pre-retirees seeking accurate information on the true cost of retirement, but also for government and welfare agencies ‘interested’ in addressing the most critical concerns of older Australians.

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™ February 2021

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Tobacco and childcare drive cost of living increase T he Consumer Price Index (CPI) rose 0.9 per cent in the December quarter.

According to the Australian Bureau of Statistics (ABS), the rise was primarily due to an increase in tobacco excise and the unwinding of the government’s free childcare scheme.

This means that non-smoking pensioners will be most unaffected by the significant price rises for the quarter, but will still reap the benefits of any pension increase on 20 March 2021.

Other price rises in the December quarter were domestic holiday travel (+6.3 per cent), with state and territory borders reopening in the lead up to the Christmas period, and medical and hospital services (+2.5 per cent), after private health premiums increased on 1 October following a six-month freeze.

The most significant price fall was in electricity (-7.5 per cent) after the WA Household Electricity Credit Well-off couples 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 6

provided households with a one-off $600 credit, resulting in a fall in electricity prices of 66.7 per cent in Perth. Perth was the only capital city to record a negative CPI rate from the previous quarter as a result of this scheme.

Food and non-alcoholic beverages rose slightly (+0.2 per cent) after the end of Melbourne’s lockdown period saw consumers again able to dine at restaurants, but this was offset by a six per cent fall in the price of vegetables thanks to easing drought conditions.

Clothing and footwear were also less expensive (-1.0 per cent) with women’s garments leading the way (-5.4 per cent) due to the increased participation of retailers in promotional events such as Black Friday.

In terms of YourLifeChoices’ six retirement cohorts, cost of living increases were very similar with 0.7 per cent rises for all cohorts except for cash-strapped couples (0.6 per cent) and well-off singles (0.8 per cent).

Cashstrapped couples

Constrained couples

Couple Couple homeowners homeowners with private on Age income Pension $183.51 $108.46 12% 13% $42.08 $31.61 3% 4% $248.63 $175.11 17% 21% $56.73 $30.97 4% 4% $30.65 $17.40 2% 2% $77.42 $33.59 5% 4% $43.09 $30.49 3% 4% (+1%) $150.73 $107.44 10% 13% $189.40 $122.95 13% 14% $34.16 $24.21 2% 3% $301.81 $102.49 20% 12% $0.61 $0.22 0% 0% $29.48 $17.89 2% 2% $90.68 $48.90 6% 6% $1,478.99 $851.72 +$9.95* +$6.09* $6,408.95 $3,690.80 +$43.10* +$26.39* $76,907.38 $44,289.66 +$517.22* +$316.73*

Couple who rent on Age Pension

YourLifeChoices Retirement Affordability Index™ February 2021

$205.42 29% $33.36 5% $158.34 22% $50.34 7% $9.20 1% $20.44 3% $16.47 2% $37.20 5% $58.46 8% $26.20 4% $66.64 9% $0 0% $12.43 2% $24.46 3% $718.95 +$4.32* $3,115.45 +$18.73* $37,385.46 +$224.84*

Well-off singles

Constrained singles

Cashstrapped singles

Single Single Single who homeowner homeowner rents on Age with private on Age Pension income Pension $123.31 $91.01 $161.83 15% 19% 36% $30.44 $27.24 $23.12 4% 6% 5% $124.91 $87.80 $78.68 15% 19% 17% (-1%) $30.59 $18.20 $25.58 4% 4% 6% (+1%) $20.39 $8.84 $7.29 2% 2% 2% $42.37 $19.67 $15.69 5% 4% 3% (-1%) $38.88 $21.97 $11.68 5% (+1%) 5% (+1%) 3% (+1%) $86.55 $38.33 $22.68 10% 8% 5% $100.33 $51.17 $34.51 12% 11% 8% $33.06 $17.07 $13.32 4% 4% 3% $140.57 $52.88 $31.91 17% 11% 7% $0.13 $0.12 $0.01 0% 0% 0% $18.36 $9.69 $8.58 2% 2% 2% $55.04 $26.79 $16.69 7% 6% 4% $844.92 $470.77 $451.58 +$6.73 +$3.20* +$2.91* $3,661.31 $2,040.00 $1,956.84 +$29.14 +$13.84* +$12.61* $43,935.78 $24,480.01 $23,482.02 +$349.71 +$166.14* +$151.29*

*Percentage and dollar changes compared with September quarter figures

How does your spending compare?

Expenditure items

Well-off couples

Constrained couples

Cashstrapped couples

Well-off singles

Constrained singles

Cashstrapped singles

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

YourLifeChoices Retirement Affordability Index™ February 2021

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Retirement system is ‘opaque and uncertain for almost all retirees’ Our retirement income system slipped to fourth on the latest Global Pension Index. Actuary and lead index author Dr David Knox tells how we can arrest the slide.

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ustralia, a nation of almost four million retirees, has one of the world’s best retirement systems. The 2020 Mercer CFA Institute Global Pension Index ranked it fourth out of 39 systems.

Last year, our ranking slipped from third. Also, we ranked only 14th in terms of adequacy. There is clearly room for improvement.

A great swathe of changes loom: there could be an increase in our compulsory superannuation guarantee (SG) levy; there’s the wide-ranging, 650-page Retirement Income Review to consider, and further changes arising from last year’s Budget that are planned to transform the super industry.

contribution of 9.5 per cent.

Indeed, the lowest rate in those countries is 12 per cent.

Retirees in those countries save for their own retirement, but they also receive, in the form of a non-means tested payment in retirement, a pension that is somewhere between 17 per cent and 30 per cent of the average wage.

Now is the time to help people with the entire ‘package’, both before and after they leave the workforce.

So, as we move toward the 2021-22 Budget, due in May, it’s timely to look back at why Australia’s world ranking fell and consider how it could be made a better system for all retirees.

The Actuaries Institute believes Australians should be able to confidently plan to live their retirement with dignity. And, in fact, our savings pool is pleasingly deep. Assets held by Australian superannuation funds have grown from around 30 per cent of GDP 25 years ago to more than 140 per cent of GDP today. These assets are held for the benefit of all Australian retirees.

Australia’s Age Pension is around 27 per cent of the average wage.

However, not every retiree gets the full or even a part pension. So there is no known base to build on.

In contrast, the pension in the Netherlands, Denmark and Israel provides a foundation, a level of comfort and certainty for retirees. While Australia debates whether we should have some form of compulsory longevity protection (such as a compulsory annuity) to cover the risk that a retiree might outlive his or her savings, a governmentprovided universal pension could also provide a similar sort of buffer. The advantage is that retirees would know they can at least count on that pension.

In Australia, the mix of private funding and the Age Pension tests make the system opaque and uncertain for almost all retirees.

The Netherlands, Denmark and Israel ranked above Australia in the Global Pension Index. Those three countries scored better marks for several reasons.

The complexity is twofold. First, many retirees are forced to constantly report their financial position to the government and recalibrate budgets as life circumstances change. Qualifying for an Age Pension, or part-pension, means constant reassessing. Second, planning for retirement is very difficult as nobody knows what level of Age Pension they may receive in five, 10 or 15 years. It is no surprise that retirees are cautious.

In each case, their systems have a baseline universal pension as well as contribution rates to their funded pension schemes that are higher than Australia’s current compulsory superannuation

In addition, Australians have become very used to the notion that successive governments will tinker with superannuation rules. Again, more uncertainty.

It would be a great benefit to all if the rules were

But we also understand that our system is complex, and not always easy to navigate. The evidence shows that many retirees are cautious and live a frugal life for fear of running out of money.

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YourLifeChoices Retirement Affordability Index™ February 2021

Australians also deserve access to more and better information on aged care.

We have heard the horror stories coming out of the Royal Commission into Aged Care Quality and Safety. More than 10,000 individuals and concerned groups have made submissions. The commissioner is due to report on those living at home, those in aged care facilities and those who have complex care problems, including dementia.

It’s not widely understood that about 90 per cent of aged care costs are paid by the government. For many, it’s unclear what’s available, where and how to access those services. There is a range of services, but the knowledge gap is immense.

People need a better understanding of what they can access and when. If someone wants to spend their last years at home, they need to know the services will be there when they need them. Funding has to be made available. Retirees in need shouldn’t be asked to join a waiting list. Our society should be better than that. kept constant for several years, thereby providing the community with greater confidence about the future.

But how else can we improve the system? We need increased focus on the spending part of retirement. Over the past quarter of a century, we have built up a strong superannuation system for the accumulation phase – that is, before retirement.

Now is the time to help people with the entire ‘package’, both before and after they leave the workforce.

One smart way to link people concretely to their retirement savings is to ask all superannuation funds to provide members with a projection of their future income in retirement, based on their current and projected savings.

Improved understanding will also help retirees better manage their budget. If they know the services they can access and how those services are funded, they may be more willing to spend their savings in their 70s and 80s. In other words, have a better retirement.

These are not controversial measures. The available information should empower Australians, improve their connection to their retirement savings and provide a level of transparency allowing retirees and those approaching retirement to make better money decisions.

In Australia, we know that there’s much to be thankful for. We have a good healthcare system and because we have compulsory superannuation, there’s a strong pool of funds for retirees. But there’s also much to do to improve the system and give everyone greater confidence about the future.

You might look at a savings pool of $100,000 and think that’s a decent amount of money on which to retire. But if that amount has to last 20 or 30 years, it becomes clear it won’t provide much more than $100 a week – an impossible amount to live on in retirement.

Dr David Knox is head of the Actuaries Institute Retirement Strategy Group, a senior partner and actuary at Mercer Australia and lead author of the Mercer CFA Institute Global Pension Index.

If we have a stronger focus on retirement income, people will better understand what their circumstances might look like and what decisions they need to make now.

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™ February 2021

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Age Pension payments in 2021 – what you need to know Smart retirees assess their financial position at least yearly, writes Jeremy Cooper, Challenger’s chairman of retirement income.

He explains why.

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orld heavyweight boxing champion, Olympian, ordained minister and successful entrepreneur George Foreman returned to the ring at the age of 45 and knocked out opponent Michael Moorer to win the heavyweight world title back in 1994. When asked why he kept fighting rather than retiring, the boxing champion spoke for millions of people, even if he didn’t know it.

Last year, COVID-19 put a dent in the economy and investment earnings, and potentially the size of share portfolios. Holders of the big four bank stocks, for example, will have noticed that not only did income reduce last year due to lower dividend payments, but so too did capital, as the big bank share prices ended the year lower than where they started.

“The question isn’t at what age I want to retire, it’s at what income,” he said prophetically.

At the same time, as the effects of COVID-19 impacted portfolios, people were still needing money to live. The cost of living across the year didn’t fall. In fact, according to the Australian Bureau of Statistics, it rose.

For most Australians, they do have the ability, albeit more limited than Mr Foreman, to determine what income they want to retire on. Obviously, the earlier individuals and couples think about the income they want to retire on, the more likely they can do that. But even older Australians can take steps to improve their income – even when already retired.

For most Australians, their retirement income reflects whatever they’ve saved and invested during their working careers, plus anything the government provides via the Age Pension and other tax benefits.

Prudent retirees, whether they be 66 or 88, need to regularly revisit their financial position to determine whether they are receiving the maximum Age Pension income they are eligible for. The March federal government support payment is a good example. There would be some retirees who would not have been able to access the Age Pension in December 2020, when the first $250 payment was made, but may now be eligible under the assets test.

There are also irregular bonuses, normally from governments paid in tough times. For example, in last year’s October Budget, the federal government provided support for age pensioners, reflecting the COVID-19 crisis. They paid $250 in December 2020 and will pay another $250 in March 2021.

What are the Age Pension assets and income tests?

Any time the government is providing support payments is a good time for a retiree to check in on his or her financial position. More prudent retirees regularly revisit their income and assets to ensure they are receiving the maximum Age Pension income they’re entitled to.

Assets test

Financial positions change – as amply demonstrated during the COVID-19 hit in 2020.

Retirees spend money, reducing assets. They might take a holiday or spend money on their homes.

And 2020 was a boom year for renovations after the federal government introduced its HomeBuilder package. Older Australians who spent money on their homes might now have reduced asset levels.

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Your rate of Age Pension is calculated under both an assets test and an income test. The test resulting in the lowest rate will apply.

The level of assessable assets you own are assessed against the assets test thresholds, which vary depending on your home ownership and relationship status. For every $1000 of assets in excess of the lower threshold, your rate of Age Pension reduces by $3 per fortnight, reducing to zero once your assets reach the upper threshold.

Income test Income from various sources is assessed against the income test thresholds, which vary depending on relationship status. The way income is determined for this test depends on the nature of the income or investment.

YourLifeChoices Retirement Affordability Index™ February 2021

For every dollar of income in excess of the lower threshold, your rate of Age Pension generally reduces by $0.50 per fortnight, reducing to zero once your income reaches the upper threshold.

Becoming eligible for a part Age Pension Changes in financial conditions and situations will have pushed some individuals and couples, no matter what their age, into the Age Pension eligibility threshold. There are also individuals and couples just above the part Age Pension cut-off point who would have fallen into it recently.

The part Age Pension, under the assets test, is generally available to single people, who own a home, with assets worth up to $583,000. For nonhomeowners, the figure is $797,500, although the figure could be higher when eligible for Rent Assistance. The full Age Pension kicks in at assets of $268,000 and $482,500 for non-homeowners.

Under the assets test, the Age Pension is generally available to a couple who own their home if their total assets are worth no more than $876,500 – or $1,091,000 if they don’t own a house (this could be higher if they are eligible for Rent Assistance). Assuming a couple don’t have any other assessable income, and assets are subject to deeming (a set of rules the government uses to work out the income created from your financial assets), the full Age Pension is available to couples with assets under $401,500 if they own a house, or $616,000 if they don’t.

Another way to edge under the assets test threshold is to invest part of your savings into a lifetime income stream (such as a lifetime annuity).

This may give those receiving a part Age Pension a boost and might enable those who are just above the part Age Pension assets test threshold to qualify for the first time.

Generally speaking, investing in a guaranteed lifetime annuity may help boost your Age Pension today and help to protect your retirement income from share-market downturns in the future.

Under government legislation, for certain lifetime income streams purchased on or after 1 July 2019, including any lifetime annuity purchased now: • only 60 per cent of the purchase price of the lifetime income stream until the age of 84, and subject to a minimum of five years, is included under the assets test; and • only 30 per cent of the purchase price thereafter.

In short, a lifetime annuity could reduce an individual or couple’s assets, as per the

government’s assets test, potentially pushing them below the threshold allowing them to receive a part Age Pension. Or for those already receiving a part Age Pension, under the assets test, an annuity could increase the amount of the Age Pension payment.

And now is a great time to review eligibility for the Age Pension. It could result in a one-off $250 windfall in March. It’s not too late to qualify for this payment.

Revisiting assets and income, and eligibility for the Age Pension, should occur at least annually. The rules are complicated and talking to a financial adviser is a great place to start.

Returning to George Foreman. Now aged 72, he would have no chance of accessing the Age Pension if he were an Australian. According to estimates, the George Foreman Grill, a hugely successful cooking appliance, together with earnings from his boxing career mean Mr Foreman is now worth close to US$300 million. He would undoubtedly fail the assets test.

Jeremy Cooper is Challenger’s chairman of retirement income and focuses on research, public policy issues and thought leadership. Before joining Challenger, he chaired the ‘Cooper Review’ into the superannuation system, and those recommendations have been substantially adopted.

Challenger is a YourLifeChoices preferred partner.

DISCLAIMER: Age Pension rates as at 1 January 2021 Age Pension benefits described above will not apply to all individuals. Age Pension outcomes depend on an individual (or couple’s) personal circumstances and may change over time. While lifetime income streams may immediately benefit some Age Pension eligible retirees who are assessed under the assets test, in later years, if assessed under the income test, any ongoing Age Pension benefits may be reduced. Consult your financial adviser about potential impacts on your personal circumstances and whether a lifetime income stream is right for you. The information in this email is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life), general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au All references to guaranteed payments from Challenger refer to the payments Challenger Life promises to pay under the relevant policy documents. Neither the Challenger group of companies nor any company within the Challenger group guarantees the performance of Challenger Life’s obligations or assumes any obligations in respect of products issued, or guarantees given, by Challenger Life.

YourLifeChoices Retirement Affordability Index™ February 2021

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You think you have enough?

Here’s why you’re probably wrong Dr Ummul Ruthbah’s paper, The Retirement Puzzle, says the industry-accepted nest egg for a ‘comfortable’ retirement is simply not adequate.

Janelle Ward outlines the research.

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he retirement system in Australia is one of the best in the world and, at the same time, not very simple. That’s the conclusion of Dr Ummul Ruthbah, senior research fellow at the Monash Centre for Financial Studies, in her 2020 paper, The Retirement Puzzle.

It’s a recurring summation, and was repeated in many of the thousands of presentations to the federal government’s Retirement Income Review. But saving for retirement and taking comfort from existing industry guidelines is another matter altogether. That is one part of the retirement puzzle where Dr Ruthbah begs to differ.

COVID-19 pandemic, a superannuation fund as large as $545,000 may not be enough to support a comfortable lifestyle.”

She says that “people with super balances of between $545,000 and $580,000 – the current industry and government benchmarks for a comfortable, largely self-funded retirement – may in fact find themselves well short, and relying heavily on the Age Pension in later years”.

In an analysis that involved 10,000 simulations based on a single male retiree who owns a home and was tracked across a 30-year retirement, her conclusions make for uncomfortable reading.

She acknowledges that our retirement system is one of the world’s best – even though it slipped from third to fourth in the most recent Global Pension Index, behind the Netherlands, Denmark and Israel. However, she warns that many present-day retirees may not be as well off as they’re expecting to be when basing their retirement plan on the size of the nest egg widely touted as delivering a ‘comfortable’ retirement.

Dr Ruthbah writes: “Given the current state of the world – higher life expectancy, close to zero real interest rate and the economic turmoil caused by the 12

YourLifeChoices Retirement Affordability Index™ February 2021

Here is an overview of Dr Ruthbah’s findings as published in The Retirement Puzzle.

“According to Australia’s peak superannuation industry body, the Association of Superannuation Funds of Australia (2019), a single male retiree would need to spend $43,687 a year to have a comfortable retirement.

According to their Super Guru website, a male retiree with a life expectancy of 86 years can live a comfortable retired life with a superannuation balance of $545,000.

“The Australian Securities and Investments Commission’s (ASIC) Moneysmart calculator adopts a similar comfortable retirement income benchmark, suggesting a retiree, retired at the age of 65 with a $580,000 superannuation balance, could spend $43,751 until age 91, after which he would have to depend entirely on the Age Pension ($24,554 p.a.).

“However, our simulation model predicts that a $580,000 portfolio with a 60/40 allocation [60 per cent equities and 40 per cent defensive

interest-bearing securities] can have a 49 per cent chance of running out of money after 30 years of retirement and a 31 per cent chance of having to fully rely on the Age Pension after 25 years.

Dr Ruthbah says her observations have serious implications for individual retirees, and how they should plan their spending trajectories, as well as for the Australian government’s finances.

“The point is, even a $580,000 super balance may not be enough to guarantee a comfortable retired life all through.

“An increase in the number of retirees becoming eligible for the Age Pension ahead of predictions would generate unanticipated stress on government financial resources,” she writes.

Figure 1: The success rates of 60/40 portfolio, spending and age pension over 30-years of retirement

“[The panel above] shows the probabilities of running out of money for a 60/40 portfolio at any given year of the retiree’s life for different superannuation balances. We find that retirees who are not eligible for an Age Pension (with a superannuation balance of $600,000) at the beginning of their retirement life as their asset is above the maximum threshold of $583,500) also have a 12 per cent chance of falling back solely on the Age Pension 20 years into retirement.

“Most retirees in Australia have a superannuation balance far less than the ASIC-recommended $545,000. The average balance of a retiree aged 64–75 in 2017–18 was $402,600, and the median was $225,200. As Figure 1 shows, a retiree with a $400,000 superannuation balance has a 20 per cent chance of drawing down his/her assets to zero 20 years into retirement, which goes up to more than 60 per cent as he/she turns 90.

“The picture is grimmer for the majority of the Australian retirees whose superannuation balance is just below the pension tapering threshold ($268,000 at time of publication, December 2020). A portfolio of $260,000 is predicted to be out of money at the end of 15 years with a probability of 61 per cent.”

The panels above show the assumed spending trajectories of retirees with super balances of $260,000 and $580,000 respectively, and their relative reliance on their own superannuation savings and the Age Pension over time.

So how much is enough?

Dr Ruthbah writes: “It is clear from our analysis that Australian retirees who start out with an averagesized superannuation balance are at significant risk of being unable to enjoy a financially comfortable retirement. This raises the question: how much in savings would someone retiring now need to live a comfortable life, particularly given increased longevity, uncertain future investment returns and the initial loss of assets resulting from the financial market fallout caused by COVID-19? “… We find that $545,000 might not be enough to live comfortably for 34 years in retirement. These

YourLifeChoices Retirement Affordability Index™ February 2021

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findings will be subject to further refinement, or perhaps substantial revision, after markets settle into new patterns following the economic mayhem caused by the COVID-19 pandemic. For now, however, they demonstrate clearly that projections by the super industry and the Australian government about what constitutes an adequate retirement nest egg may have been significantly underestimated.

Success rates of portfolios under different riskreturn scenarios

condition may not be huge. Even if the volatility of the market tones down in the next 40 years as suggested by the more recent data, the returns are also likely to be revised downwards. The very optimistic picture of the future market (3.5 per cent return with 6.5 per cent volatility) also portrays that a portfolio of $650,000 has a 7 per cent risk of running out at the 30th year.”

Notes: the Optimistic portfolio has an expected real return of 5.1 per cent with an annual volatility of 10.1 per cent. The Optimistic 2 portfolio has 3.5 per cent real return and 6.5 per cent annual volatility.

“(The above panel) shows the probabilities that portfolios of size $650,000 and $800,000 will last at different time horizons under different risk-return assumptions assuming that the first year of retirement will be the worst year in terms of portfolio returns.

“It shows that even a portfolio of size $650,000 has a very high probability (45 per cent) of running out of money at the 30th year of retirement if the market follows historical risk-return patterns in the coming years.

“At these risk-return trajectories, a retiree would require a superannuation balance of at least $800,000 to last up to 30 years with a probability of 70 per cent. However, the requirements are less stringent under more favourable market expectations.

“Nevertheless, the historical performance of the equity and bond markets in the developed countries suggests that the prospect of a favourable market 14

In further evaluations of Australia’s retirement system, Dr Ruthbah writes: • The means-tested Age Pension provides incentives for older Australians to deplete their superannuation early in retirement, with significant negative consequences for government finances.

• The current retirement system and the variations in opinions regarding its sustainability and efficacy are puzzling for practitioners and researchers in this industry, let alone for most of the retirees, who do not have adequate financial literacy.

In conclusion, she writes that our retirement system is one of the best in the world and at the same time, not very simple, citing “all the rules of Age Pension, income and asset tests, minimum drawdown of super and income deeming”.

Dr Ummul Ruthbah holds a PhD in economics from the Massachusetts Institute of Technology, where she was an International Monetary Fund scholar. She was a consultant to the World Bank for five years and is a senior research fellow at the Monash Centre for Financial Studies. Her current research interests include issues related to sustainable finance and retirement planning.

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™ February 2021

Adequacy of retiree nest eggs YourLifeChoices conducts several surveys each year to gauge the financial, physical and mental health of our 260,000 members. The aim is to shape our content and share your challenges with appropriate government and advocacy bodies. This is what you told us about your confidence in the financial aspects of your retirement.

Pre COVID, did you feel confident you could live comfortably in your own home with adequate funds to pay for your retirement lifestyle? And now?

Yes very confident Somewhat confident Uncertain Very worried

THEN 34% 44% 17% 5%

NOW 22% 44% 26% 8%

How confident are you that your current financial retirement plan will enable you to live a comfortable life?

Very confident 11%

Confident 27%

Neutral 17% Somewhat confident 20%

How much in total savings do you believe you need for a comfortable retirement

Do you spend less today in case you face a large unexpected expense in the future?

as a single?

$150,000-$200,000 12% $200,000-$300,000 17%

$300,000-plus 71%

as a double?

$400,000-$500,000 21% $500,000-$600,000 21%

$600,000-plus 58%

Yes 72%

No 28%

Not confident 25%

Compared to your spending just before retirement, is your spending in retirement or your expected spending in retirement: Much higher 1%

Thinking about your own relationship status, do you have the amount you selected above?

Higher 8%

Lower 34%

Much lower 22%

About the same 35%

Yes 41%

No 59% Sources: 2020 Ensuring Financial Security in Retirement (3000 respondents), 2020 Insights Survey (5723 respondents), 2020 Confidence in Retirement Survey (4453 respondents), 2019 Retirement Matters Survey (5082 respondents).

YourLifeChoices Retirement Affordability Index™ February 2021

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The big question: how much do I need to retire?

Personal finance expert Noel Whittaker tells how you can work out what you need to press the retirement button.

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ife expectancies continue to rise, and with that comes a host of challenges. For governments, there’s the increasing cost to budgets and, for retirees, there’s the uncertainty of how long they can expect to live.

be available to them. Sadly, this is still a work in progress.

The process went to the next step with the government announcing new means test rules for “lifetime income streams” purchased on or after 1 July 2019. From that date, only 60 per cent of the purchase price is assessed for the Age Pension assets test up to age 84 (or for a minimum of five years) and 30 per cent thereafter.

To make it even more complex, Australia has a unique retirement income system. In many countries, you could be guaranteed some sort of a pension, usually indexed, for as long as you live.

But our retirement system is based around a lump sum superannuation fund, with the Most retirees are … scared of retiree drawing an accountrunning out of money and/or of based pension from that fund.

having insufficient funds to get

As well as providing increased flexibility for retirees, they can be highly effective in maximising Centrelink benefits in some circumstances. They are complex, so if you are considering investing in them, get expert advice.

This highlights the next challenge. To ensure your quality aged care in their later money lasts as long as you years. do, it’s wise to invest a big chunk of your assets in growth That’s the background, but investments such as property and shares. But these the question on most pre-retirees’ lips is: how much by their nature have ups and downs, which leads money do we need to retire? more inexperienced or risk-adverse investors to favour cash-based investments where, historically, There is no simple answer, as people’s spending returns have been much lower. To make matters habits vary enormously, and a heap of variables – worse, interest rates are at a record low. This makes such as how long you will live and the state of your cash and bonds extremely risky assets in which to health – come into play. Even so, it’s worthwhile invest. doing some calculations as a guide for future strategies. Here’s how to use the calculators on my The result of all this? Most retirees are reluctant to website to design your retirement future. spend as much as they could. They are too scared of running out of money and/or having insufficient Think about a couple, both aged 62, who wish to funds to get quality aged care in the later years. retire at 66. They own their home, and their financial assets on retirement should be $500,000 in super The government is well aware of this, and four years and $80,000 in bank accounts. For Centrelink ago put the retirement industry on notice to develop purposes, their furniture and motor vehicle would be products that would solve the problem of running worth $20,000. out of money.

Their first step is to do a budget, to get some idea These were to be known as Comprehensive Income of their living costs now and when they retire. The Products for Retirement (CIPRs) and worked on the ASIC website, moneysmart.gov.au, is a fantastic premise that retirees would invest a portion of their resource that shows how to prepare a budget and superannuation into a product, which was to be also provides useful calculators. held separately, to provide an annuity if and when The couple’s present spending needs to be adjusted the retiree reached 85 years of age. The theory for retirement, eliminating items such as travel to was that retirees could then spend with confidence work, bought lunches, work clothes and union fees. knowing that if they did reach 85, an income would 16

YourLifeChoices Retirement Affordability Index™ February 2021

Two-car families should also consider whether they could reduce their car costs by having only one car in retirement.

We now have specific data. Their expenses should be $70,000 a year, and the pension will provide $21,500 of that. The shortfall is $48,500 a year.

This exercise can be challenging; you have to accept that there are some items for which you can make a reasonable estimate, and others that are at best a good guess, because the final outcome will be known only in retrospect.

To complete the exercise, simply go to my retirement lump sum calculator and enter $48,500 as the yearly income needed, using an indexation rate of, say, 1.5 per cent, an earning rate of your choosing and how many years you need your money to last. The calculator will tell you that a lump sum of $690,300 would be necessary to provide an indexed income of $48,500 a year, at an earning rate of 7 per cent a year. This assumes all funds will be exhausted after 25 years.

After doing the budget, our couple decide that $65,000 a year – in today’s money – would give them an adequate retirement income.

Their next step is to go to my future value calculator and convert that sum to its value in four years. We’ll apply an inflation rate of 2 per cent. The answer is $70,400, which can be rounded down to $70,000.

Next, they need to work out their Centrelink entitlements. Using my deeming calculator, they enter their financial assets, superannuation and bank accounts – all of which are subject to deeming. The sum of $580,000 produces a deemed income of $434 a fortnight.

Next, they go to the Age Pension calculator and enter income of $434 and assessable assets of $600,000. The result will be a pension of $682 a fortnight each under the income test and $414 each under the assets test. Centrelink uses the test that gives the lowest pension, so they should be eligible for a total fortnightly pension of $828 or $21,500 a year.

It’s important to understand that these numbers are not cast in stone – and you need to review your situation at least once a year to see if you need to adjust your strategies. Also, some people will receive bequests when their parents pass on, and these numbers should be factored into the calculations.

What this planning does is give you a chance to consider whether you need to boost your superannuation by working a little longer or reduce your planned expenses.

Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance.

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™ February 2021

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Services that can help you take charge of your retirement When a helping hand is offered, you’d be mad not to grasp it.

Brendan Ryan offers a comprehensive list of services set up to assist retirees.

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ast year, I put together a retiree checklist. In 2021, there are some additions. This is a long list and not everything will apply to you, but it should help you organise your retirement.

Managing your risk If you deal with a financial adviser, check their credentials using the ASIC Financial Adviser Register. If they are on this list, they will have a bunch of obligations including being a member of the Australian Financial Complaints Authority (AFCA). One of the biggest fraud stories of 2020 involved an unlicensed financial adviser, which means no compulsory insurance and potentially no recourse through the AFCA. If you delegate authority to your adviser to transact on your behalf, make sure you have your own logins to your accounts so you can also see what is going on. That same fraud story involved clients relying on fake statements.

If you manage your own superannuation, it may be a good time to review other ways of managing your savings. Understand the difference and familiarise yourself with the responsibilities of managing your own superannuation. There is a massive amount of responsibility and administration required that may be better organised by a big company that is probably offering better and cheaper service than was available when you first decided to manage your super fund yourself.

Applying for the Age Pension or Commonwealth Seniors Health Card 1. In July 2021, the Age Pension age will go to 66.5, which is confusing if this is the year you turn 66. If relevant for you, make a diary note to look closely at the Age Pension application process 12 weeks before your actual birthday so you can address any hiccups well in advance.

2. As soon as you receive your Pensioner Concession Card, start applying for your entitlements (see opposite for the top five).

3. If you are turning 66 this year, and you are not eligible for the Age Pension, make sure you know why so you can get ready to reapply if your circumstances change.

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4. If you are turning 66 this year, and you are not eligible for the Age Pension, then apply for the Commonwealth Seniors Health Card (CSHC). This card is income tested and could save you more than $2500 on healthcare costs. Low income returns on investments and changes in deeming rates mean that your eligibility may have changed.

Update Centrelink If you are already receiving a part pension, make sure Centrelink is up to date with the right data. For part pensioners, a change in assets of $1000 could mean an extra $78 per year in Age Pension payments.

Check that the right value for your car or caravan is in the system, and check that household contents are realistically valued. These assets are means tested and can be the difference between receiving a pension and not. Your savings may have changed due to a holiday, renovation or medical emergency.

Get MyGov organised The government wants you to access departments online. Now is the time to get set up online. Here are some of the things you can do via MyGov: 1. Easily update income and assets by accessing Centrelink 2. Check your Medicare claims and track your safety net threshold by accessing Medicare 3. Complete your tax at the press of a button (or two) using MyTax 4. Start collecting your health data for easier use via My Health Record.

Check on your entitlements 1. If you receive an Age Pension, make sure you are receiving these five entitlements: • gas rebate • electricity rebate • water rebate • council rate discount • driver’s licence and registration concession.

YourLifeChoices Retirement Affordability Index™ February 2021

2. If you are in NSW and hold a CSHC, check the Seniors Energy Rebate. You need to reapply for this each year (this is not for age pensioners).

3. If you are in NSW, hold a CSHC or receive an Age Pension, and live in a regional area, apply for this year’s $250 Regional Seniors Travel Card.

4. Travelling by public transport in NSW? If you want to make the most of government transport help, take a look at the following: Pensioner OPAL Card, Pensioner Travel Vouchers, Country Pensioner Excursion Tickets and Regional Excursion Daily (RED) Tickets.

5. Search for entitlements, concessions, rebates, programs or whatever they are called. I have more than 40 and counting on my list. Policies change, federal budgets have announcements – it’s a moving feast. Everything from replacement appliances, fishing licences, pet registration and stamps. And from all levels of government and in different departments.

6. If you are part of a couple, ensure you are registered for the Medicare safety net as a family or couple.

Pensioner Concession Card or the CSHC holders get access to Concessional Medicare Safety Net thresholds, making this one a no-brainer.

Making and adjusting your plans If you are trying to work out whether your savings will last, try the ASIC Moneysmart Retirement Planner. It’s better than many of the services provided by for-profit companies as it includes Age Pension eligibility and works this out over time.

Working and the Age Pension If you are turning 66 or over, and are working, do not assume you cannot receive a part Age Pension.

For someone with a small amount of savings, and a low-income job, there may be benefits from knowing what is changing.

Fine-tuning your investing 1. If your investments are hard to track, hard to organise or you cannot link your investment strategy to your retirement plans, it might be time to consolidate and simplify. There is a link between asset allocation strategies and expected returns. ASIC explains it here.

2. Australians in later life are more likely to invest at the conservative end of the spectrum using the reliability of returns in a diversified portfolio. Use these expectations, an understanding of spending, and expectations of government support as the basis for long-term retirement spending plans. A long-term plan should be easy to hang your hat on with the discipline in regular reviews to make sure the plans still make sense. Allow for medical emergencies, aged care, sudden yearning for travel, urgent house upgrades and maintenance, bailing out a child … the list is endless.

The Pension Loans Scheme 1. If you own property and need a top-up for your day-to-day living income, the Pension Loan Scheme (PLS) may be right for you. The interest rate is 4.5 per cent.

2. If you are eligible for an Age Pension at $0, you can apply for the PLS. Wait a minute? What does this mean? It means that you can apply for a loan even if you are a self-funded retiree. This may suit people with illiquid assets that stop them from receiving an Age Pension, who may be cash poor. People with income streams that prevent them qualifying for a pension (via the income test) may also apply for a top-up. The government is keen for you to tap into your property value to support your spending in later life.

What else?

A look back on what happened in 2020 lays out the themes for 2021: 1. The government wants you to go digital. As hard as this may seem to get set up, once you are there you will not want to go back to queues, call waiting and uncertainty. Information is available and easily updated and this should be a key focus in 2021.

2. Large companies saying one thing and doing something else is a problem, and they can be difficult to contact. Independent advice will help you set up in your best interest.

3. Low interest rates, unpredictable markets, long lives, uncertain future expenses … it’s a balancing act. Putting all the elements together takes work but is worth it for the peace of mind.

Brendan Ryan is a financial adviser and founder of Later Life Advice. This article has been reproduced with his permission.

It first appeared on firstlinks.com.au. It is for general information purposes only and does not consider the circumstances of any person.

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™ February 2021

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Government update YourLifeChoices keeps you up to date with retirement income changes.

Economic support payment The federal government’s next scheduled economic support payment of $250 is scheduled to occur in March 2021.

If you have received the previous economic support payments and your circumstances have not changed, you will automatically be eligible for this payment.

Don’t think you’re eligible? You may wish to read Jeremy Cooper’s article on page 10 to see if recent circumstances mean you now qualify for the March payment.

You will receive the payment if you are living in Australia and receive an eligible Centrelink payment or hold an eligible concession card.

The eligible payments and cards include: • Age Pension • Carer Allowance • Carer Payment • Commonwealth Seniors Health Card • Disability Support Pension • Pensioner Concession Card.

The Department of Veterans’ Affairs (DVA) will also pay the economic support payments to anyone receiving an eligible DVA benefit.

You do not need to claim the payment – it will automatically be paid into your bank account.

If your eligibility for the payment comes from a Commonwealth Seniors Health Care Card, make sure Centrelink has your bank account details.

You can update your bank details through your Centrelink Online Account.

The economic support payment is non-taxable and does not count as income.

If your circumstances have changed, you have until 26 February to apply for a qualifying card or payment.

YourLifeChoices advises self-funded retirees to check their eligibility for the Commonwealth Seniors Health Card and, therefore, their ability to claim the payment.

PBS co-payments The maximum co‑payment for general patients for drugs listed on the Pharmaceutical Benefits Scheme (PBS) is now $41.30 per PBS script in 2021, an increase of 30 cents (or 0.7 per cent) from the 2020 level.

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The PBS co‑payment for concession card‑holders remains capped at $6.60 per script. Federal health minister Greg Hunt said the safety net threshold for concession card‑holders remained at $316.80 per year. “When a concession card-holder reaches the Safety Net threshold, they will be eligible for a Safety Net Card and receive PBS medicines free of charge for the rest of 2021,” he said.

Several new drugs have been listed on the PBS, including Darzalex, a treatment for patients with multiple myeloma, Otezla for severe chronic psoriasis and Uptravi for treating pulmonary arterial hypertension.

Health fund premium increase Health insurance premiums will increase by an industry-weighted average of 2.74 per cent on 1 April.

Health minister Greg Hunt says singles will pay an extra $59.28 per year on average for their health insurance, families will pay an average of $126.88 more.

The specific price change for your fund depends on the insurer and the type of cover you hold. Your premium may go up by more or less than the 2.74 per cent weighted average.

Private health government rebates will also decrease from 1 April 2021, making 65-year-olds with an average policy around $40 p/a worse off come tax time.

Super fund changes The Super Guarantee (SG) is scheduled to increase from 9.5 per cent to 10 per cent on 1 July 2021, although the federal government is yet to officially commit to the increase. Other changes expected on 1 July include: workers automatically keeping their super fund when they change jobs, fund administrators providing more details about their investment decisions and an annual performance test.

Age Pension rates The current Age Pension rates are expected to be adjusted from 19 March. Since the most recent adjustments in March 2019 – the usual September review kept payment rates on hold because of the recession – the following rates have applied: Single: base $860.60, supplement $69.60, energy supplement $14.10 – total $944.30.

Couple (each): base $648.70, supplement $52.50, energy supplement $10.60 – total $711.80.

YourLifeChoices Retirement Affordability Index™ February 2021