Independent finance expert and top-selling author Scott Pape offers his tips to help everyday Australians build their financial literacy. The Barefoot Investor: The Only Money Guide You’ll Ever Need 2019 Update Edition, is being released to bookstores this month. He shares this extract.
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Introducing the Donald Bradman Retirement Strategy – why you don’t need $1 million to retire.
This strategy works for everyone, regardless of how much they have in super.
What we’re focusing on is getting you to a comfortable retirement …
As I’ve said, if you can’t explain your financial plan in 30 seconds – or sketch it on the back of a serviette – you really don’t have a financial plan at all.
Thankfully, there are only three steps to achieving a comfortable retirement.
Rule 1: You must have the banker off your back
This strategy only works if you retire debt-free … as in no mortgage …
Rule 2: Nail your number
You can’t retire until you’ve nailed your retirement number as a minimum (more money is better): $250,000 in super for couples and $170,000 for singles.
Hang on, what’s so special about these numbers?
This is the maximum dollar amount of assets (excluding your family home) that you can have and still get close to the maximum rate of Age Pension. At the time of writing, the maximum rate of Age Pension is $36,301.20 per year for couples and $24,081.20 for singles. And it will get you 60 per cent of the way towards your comfortable retirement number on its own.
Think of this as your safety net: it’s guaranteed by the government; it’s indexed twice a year to keep up with inflation; and it will be paid until the day you die.
In other words, if your assets are worth less than $250,000 or so – excluding your family home – that’s the gift that pension-age retirees receive from the government by virtue of living in the greatest country on earth.
Hang on.
From experience, I know that last paragraph has probably made you spit out your Tetley’s tea, especially if you’re what’s known as an ‘in-betweener’ – someone who has slogged away and saved up enough money in super that you don’t qualify for the pension, but not enough to be ‘rich’.
I have two answers for you:
First, you will always be ahead financially if you don’t need to qualify for the Age Pension. That’s the way the system’s designed – as a safety net only.
Second, as someone who pays my fair share of taxes – something I’ll continue to do for decades to come – the idea of ‘welfare’ rubs me the wrong way. I’m certainly not planning on relying on the pension in my retirement. And anyone under the age of 50 who reads this book and puts in place the Barefoot Steps won’t have to either.
However, I’m a financial adviser, not a politician, and my job is to help you, your family and friends live comfortably within the rules. In my opinion, the government will not get rid of the Age Pension (besides, comparatively, Australia spends less on its pension safety net than many other countries), though they will limit who can get it. As they bloody well should.
Let’s take a look at the retirement scoreboard so far.
1. You’ve paid off your home.
2. You’re getting an Age Pension of $36,301.20 (per couple) a year, indexed for life. And you’ve got $250,000 in super, which will allow you to draw a tax-free income of $12,500 a year. I’ll explain exactly how to invest it in the next few pages.
So, you’re now at $48,801.20 per year. Even better, this money is guaranteed to keep up with inflation, and it’ll last until the day you call stumps.
And you’re closing in on your ‘comfortable’ target of $60,997 for a couple.
Let’s keep going.
Rule 3: Never, ever retire
It’s said that the two most dangerous years of your life are the year you’re born and the year you retire.
Well, it looks like you made it through the first one, so let’s talk about the second.
The golden rule of retirement is … keep working.
That doesn’t mean you have to keep your existing job (especially if you’re a tiler with dodgy knees).
You can do something less labour-intensive – just a day or so a week, and it doesn’t need to be every week.
Work is good for you: retirees who continue doing some kind of part-time work are found to be the happiest and the least likely to suffer depression.
Why not use the skills you’ve honed over your career to do some useful work?
I meet so many Uber drivers who are well-to-do retirees who don’t need the money – they just like chatting to people and earning their keep at the same time.
And better yet, if you do work, the government will bend over backwards to help you.
Once you reach pension age, you’ll not only be able to draw a tax-free pension from your super, but in addition a couple can earn up to $28,974 each without paying a cent of income tax (singles can earn $32,279 per year).
Yet, your adviser says, ‘You’re a winner, you don’t have to work another day in your life’.
Barefoot says, ‘Work anyway, even if it’s a day a week’. The biggest mistake you’ll make with your retirement is to give up working.
You’ll never, ever run out of money
Let’s take a final look at the retirement scoreboard, after you’ve applied all three rules:
1. You’ve paid off your home.
2. You’re getting the full Age Pension of $36,301.20 (per homeowner couple) per year, indexed for life.
And you’ve got a balance of $250,000 in super, of which you are legally required to draw down a minimum 5 per cent each year.
Now, after you turn 65, you’re legally required to draw down a minimum 5 per cent of your account balance – in this case, $12,500 of tax-free income per year. As you get older, the minimum you’re required to draw down gradually increases. Why? So you spend it … and don’t hoard your nest egg in a low-tax environment! And, if you don’t need to draw down the full 5 per cent to live la vida loca – and in this plan you don’t – you have the option to squirrel the excess back into super.
3. You and your partner each work just one day a fortnight (and not every fortnight – you’ll be in Noosa, remember) to bring in a combined $15,600 a year, completely tax free. (You can both earn $300 per fortnight – as an employee or via a side business – without paying tax or affecting your pension.)
Age Pension: $36,301.20
Super pension: $12,500
Work: $15,600
Total: $64,401.20
Are you on board with Scott’s strategy? Are you determined to never fully retire?
Scott Pape is an investment adviser, author, radio host and television presenter. He writes for News Corp newspapers and is the ‘Money Guru’ for Triple M Radio.
The Barefoot Investor: The Only Money Guide You’ll Ever Need has been in the top 10 bestsellers since its release in 2016. It is now updated and in all good bookshops.
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