For many workers in the design and construction sector throughout Australia, the next six to 12 months will be challenging.
Longer term, however, it is important to think about lifestyle and security in retirement.
This raises questions about how to approach retirement planning, what the options are and what needs to be considered.
For answers, Sourceable posed written questions to Simon Power, Manager, Advice & Retirement Services, at Cbus Super. Cbus is an industry super fund for the building, construction and allied industries.
According to Power, there are several common misconceptions when it comes to retirement planning.
Amongst these are beliefs among workers that:
- They need at least $A1 million in accumulated savings in order to retire comfortably
- They will not benefit from financial advice
- Their investment journey is complete when they retire
- They can’t retire until they reach the
Age Pension age.
According to Power, these statements are not correct.
On the first point, he says Cbus modelling has indicated that many people can retire comfortably on less than $1 million in savings and that even a modest balance can deliver a better retirement than what many people think.
This is particularly so when age pension entitlements are added into the equation. Regarding financial advice, Power says ideas about this not being beneficial stem from either people having a small amount of savings or from a belief that information and advice from family, friends and colleagues is sufficient.
In fact, he says many who attend Cbus’ retirement planning seminars later indicate that they wish they had done so sooner.
Furthermore, even small pieces of information or advice can make a significant difference over the long-term, Power said. He added that many super funds typically offer advice at either low or no cost.
Addressing the third point, Power says ideas about investment journeys being complete upon retirement are misplaced.
The reality, he says, is that most people will live around 20 years after retirement.
Money invested, he said, therefore needs to work hard for you after you retire.
Finally, regarding ideas about retirement not being possible until people reach the age pension age, Power says this is not correct.
To be sure, Power says there can be financial implications for those who retire early. Moreover, superannuation can be accessed only when people reach the ‘preservation age’ (between 55 and 60, depending on when people were born).
Nevertheless, there is no law dictating when people should or should not retire. Moreover, early retirement is possible for those who plan carefully and have sufficient savings.
What Are Your Options?
Broadly speaking, Power says superann-uation funds fall into five categories.
These are Industry Super Funds, Retail Super Funds, Corporate Super Funds, Public Sector Funds and Self-Managed Super Funds.
Access to corporate funds and public sector funds is generally restricted to workers for certain companies or government sectors.
Both industry funds and retail funds, however, are usually open for investment by members of the public.
Retail funds are generally created and managed by financial institutions such as banks and insurance companies.
Industry funds, by contrast, are typically created by industry bodies and trade unions. These are generally run on a not-for-profit basis with all profits going back to fund members.
According to Power, both industry funds and retail funds can be suitable for those who would prefer to ‘let the experts look after it for you’ and who are content for their fund to invest their retirement savings according to a set investment strategy.
Within each fund, several options are offered which deliver varying levels of risk and expected return.
Speaking particularly about Cbus, Power says these options range from ‘cash savings’ at one end of the spectrum to ‘high-growth’ at the other.
For those who prefer greater control, meanwhile, the fund also offers a ‘self-managed’ option which enables members to invest directly in shares, exchange traded funds, term deposits, property or other infrastructure investments. Finally, there are self-managed-super- funds whereby members manage the fund on their own and assume control for investment strategies and compliance on their own.
According to Power, these funds offer the greatest level of choice and control.
Nevertheless, he cautions that they also involve significant levels of work and risk. With small balances, meanwhile, SMSFs also involve a relatively high level of cost.
Despite the flexibility which these funds do offer, it should also be noted that some restrictions and limitations on use of SMSFs to invest in direct property.
Issues To Think About
Asked about what workers need to consider when planning for retirement, Power says this is a broad question but mentions several issues which relate specifically to design and construction.
Since working in construction entails significant physical risk, it is important to have suitable insurance to cover situations whereby injury or illness causes an inability to work.
This is particularly important for those with young families and/or a mortgage to pay.
For those running their own business, suitable business insurance is also critical.
Next, it was important to continue to make regular contributions to your super. Design and construction, Power says, tends to have a large number of self-employed workers as well as contractors– groups which have a significant tendency to neglect their super in favour of more pressing needs regarding immediate cash flow.
This, Power says, can create a situation whereby they fail to afford adequate consideration to how they will fund their retirement until they draw close to retirement age – at which point it is often too late.
Instead, he says that making small but regular contributions to your superannuation can make a significant difference to your retirement and can also deliver benefits associated with tax.
Another important consideration for business owners is that superannuation can be protected if your business fails and you enter bankruptcy.
On this score, Power cautions that this generally works only for regular and consistent contributions which have been made to a regulated superannuation fund. Business owners cannot, Power said, make large contributions immediately prior to declaring bankruptcy and expect that these will be protected.
Finally, for those working in manual jobs, Power talks about the need to be aware that they may not be physically capable of working through to the age pension age of 67.
Where possible, he said those in this situation should consider planning for early retirement.
Strategies for Retirement Success
Finally, Power says there are several strategies which can help to improve the chances of successful retirement outcomes.
First, it is important to start making superannuation contributions early.
This is important, Power says, as even small contributions can make a significant difference to your outcome in retirement. To illustrate this concept, Sourceable used the Retirement Planner calculator on the Federal Government’s MoneySmart website.
Take, for example, a 40-year-old single person who worked until age 67 and who has a current superannuation balance of $250,000 and an income before tax of $80,000.
Were that person to have only an employer contribution to his or her super fund, the calculator estimates their annual income in retirement (until age 90) would be $47,273.
Were that same person to also make before tax (salary sacrifice) superannuation contributions, their estimated annual income in retirement would rise to $49,828.
Next, Power said it was important to get financial advice and improve your awareness of the options available.
Retirement planning seminars, he said, were a useful start.
Third, where possible, it was important for workers to plan their exit from the workforce and their entry into retirement.
This is the case not just from a financial perspective but also a broader lifestyle viewpoint.
When people retire, Power said many experience not only financial changes but also social changes as they no longer have daily contact with colleagues and others.
As this happens, many need to find new ways to deliver meaning and purpose and to plan activities such as hobbies, travel and looking after grandchildren.
Finally, Power said it was a good idea to speak with Centrelink.
“Don’t be frightened about talking to Centrelink,” Power said.
“Many people put this off and discover that they have missed out on benefits as a result. Centrelink have Financial Information Service Officers who provide information and general advice about getting the most out of your entitlements. They are actually there to help you! “Good financial advice can also make a big difference here.”