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NEWS - PLANNING
Retiring early
1/21/2002
More Australians are chasing the dream of early retirement, but only those with a finely tuned investment strategy are likely to save enough money to live 30 to 40 years beyond age 50 without working again.
The number of Australians who quit work before reaching 65 increased steadily over the 1990s, according to official figures from the Australian Bureau of Statistics.
But research from Rothschild Australia Asset Management suggests that anyone with similar plans must act now and leverage the benefits of superannuation to achieve their goal.
Rothschild's superannuation experts have found that anyone wanting to retire at 50 will have to save twice as much every year as someone who aims to retire at 55, or nearly seven times as much as someone planning to retire at 65.
This means that a 35-year-old who wants to retire at 50 with an annual income of $50,000 may have to save $55,372 this year and increase that amount by 3 per cent each year to achieve their goal. To retire at 65 with the same income, they may have to save only $7,400.
There is such a large difference in the required annual savings level because retiring at 65 gives an investor 15 more years to save, which means that his or her savings need to last 15 years less than someone who retires at 50, according to Rothschild's associate director of technical services, Kevin Smith.
"The figures are exacerbated further because anyone retiring at 50 can't access their superannuation until he or she reaches 55, and must invest some money outside of super to provide an income stream between 50 and 55," Smith says.
Money invested outside of super won't attract the same generous tax concessions that apply to super, and this means an investor will have to save harder to build enough money to fund a retirement starting from age 50.
Smith reckons that the tax savings of super can boost investment returns by 1 per cent each year. This is because earnings on super are taxed at a maximum of 15 per cent in the accumulation phase rather than the maximum 48.5 per cent levied on other investment earnings.
Capital gains tax also costs less in super and is levied at about 10 per cent after the one-third discount now applied to CGT.
Imputation credits from franked Australian shares reduce the tax burden on an investment portfolio even further, says Smith.
"Rothschild's superannuation Australian equity imputation fund has paid no tax in some years because of imputation credits and lower capital gains tax rates," he says.
Rothschild's estimates of how much you have to save to retire at 50 suggest that an investor would do best to split the first annual contribution to an early retirement savings plan and put $31,100 into super contributions and $12,500 into non-super investments.
The good news is that if this money is invested wisely, the amount you have to invest each year could fall sharply. By saving smarter, rather than just harder, the amount you have to save each year to retire at 50 could fall by almost $12,000 to $43,542.
This could be achieved by a 1 per cent increase in after-tax investment returns, according to Rothschild's calculations. The same increase in the after-tax earnings of someone wanting to retire at 65 would more than halve the amount he or she would have to save every year to $3,400.
Obviously, an even bigger increase in investment earnings would decrease the savings burden even further. The key to generating an extra return is how you choose to split your savings - either super or non-super - between different investments.
"It is critical to get your asset allocation right over time, not just while you're accumulating super but also once you have moved into the pension phase," Smith says.
"People should continue with the same investment strategy once [they reach retirement and start relying on investment earnings for income]."
One of the best ways to boost investment earnings is to tilt an investment portfolio towards growth assets such as shares and property that tend to generate capital gain, not just income, over the long term.
But Deutsche Private Banking Research warns that a retirement portfolio with a 100 per cent exposure to growth assets is likely to be subject to extreme volatility. This means that investors who do not have a large retirement nest egg could be taking a risk if they draw down a lot of income from their savings each year.
The risk can be reduced by drawing down a lower level of income, which will enable you to adopt a less aggressive asset allocation, according to Deutsche's research.
Having to live on a lower income is a downside. If that's no concern and you have little in the way of investments outside of super, there is a little-known way of accessing your super early that could fulfil your dream of early retirement.
"People under 55 can access their super if they take out a non-commutable lifetime pension," says an associate director with Deutsche Asset Management, Peter Haggstrom.
A non-commutable lifetime pension is an income stream purchased from a life office with superannuation money and available to anyone under 55 who retires from the workforce permanently.
One of the downsides of this product is a low rate of return. A 65-year-old with $100,000 to invest would get an annual return of only $6,000 to $7,000 and a 50-year-old would get less, says a technical services manager with AMP, John Perri.
The other downside is that a non-commutable pension can't be changed back into a lump sum - once you've bought it, you're stuck with it for life.
Another strategy once you've reached 55 is to cash in your superannuation but keep working for less than 10 hours per week.
Superannuation rules say that anyone between 55 and 59 can claim their super if they have ceased employment and will not work either full-time (defined as at least 30 hours per week) or part-time (defined as at least 10 hours per week) once the money is released.
This means you could work up to nine hours a week and still be "retired" for the purposes of gaining access to your super.
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