HLB Mann Judd: Lesson to be learned in retirement – capital needs management not just preserving

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Some retirees are failing to switch their approach from a focus on building and preserving capital to one of managing their current financial needs, which may cause problems later in retirement, says Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.

Jonathan Philpot“A recent study showed many Australians die having more capital than when they retired, which highlights the need for retirees to review their attitude to superannuation.

“It suggests that they are forgetting that the superannuation system is intended to provide income for a comfortable retirement, not to create an estate to be passed on to others.

“The idea of superannuation is for it to pay a pension that will last for the lifetime of the member, and while some people do have more than they need in superannuation, this is not the norm.

“There may be some retirees who have more than enough money and can look at ways to preserve capital, but most people will not be in this position, and a focus on maintaining capital levels could result in them struggling to get by.

“Greater focus needs to be given to helping retirees understand that the first priority of capital in retirement, particularly superannuation savings, should be to help them enjoy life.

“Retirees’ own financial needs must be considered first and then other issues, such as intergenerational wealth transfer or paying for grandchildren’s school fees, can be addressed.”

Mr Philpot said that knowing how long retirement savings will need to last has always been a problem, and wanting to preserve capital is not a new development.

“Retirees have always been reluctant to draw down their savings.

“What they need is a retirement capital plan and budget based on life expectancy, together with the cost of different lifestyle scenarios, so they can see their options and understand better what their real capital needs are.”

He added that for those who do have more than enough in retirement and are looking at preserving capital, there are other options such as family trusts, especially where intergenerational wealth transfer is a priority.

“A reason often given by retirees for preserving capital is that they want to leave something to help their children and grandchildren.

“This is fine if they can afford to maintain capital without affecting their own lifestyle, but retirees must look at their own circumstances to see what is best for them, not just their families.

“For example, a couple that started a family when they were in their late twenties or early thirties, and who have a life expectancy of 85 years, will be leaving their unused capital to children who are about to retire themselves.

“In other words, they could well have been denying themselves in their own retirement to help fund their children’s, which doesn’t really make sense.

“It gives rise to the question ‘Why fly economy class on overseas holidays in retirement just so your children will be able to travel business class on theirs?’

“It also reinforces that people with more in their super fund than they can possibly spend should be looking at alternative vehicles to make intergenerational wealth transfer easier and more tax effective,” Mr Philpot said.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.

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For more information please contact:

Jonathan Philpot
Phone: 02 9020 4196

4 March 2016