Funding Future Retirement

For Pre-retirees

Are you under-funded?

This question has to be the starting point for all Pre-retirees since most of us are under-funded for retirement.

As a general rule, a single Retiree needs 45% of annual pre-retirement income and a couple needs 60% of combined annual pre-retirement income to live comfortably. 

Assuming the home is fully owned this, typically, in the Australian test market represents a minimum annual after-tax retirement income of:

The pillars of effective retirement planning

Traditional four pillars

Putting aside the aged pension (if eligible at all), the four pillars relied upon as the traditional basis for retirement planning are:

  • savings
  • investments
  • voluntary superannuation
  • family home

The problem for most Pre-retirees is that even with all four pillars, they remain seriously under-funded for their retirement in the Australian test market:

  • average savings +  investments at retirement  = AUD$215,000 (males) or AUD$96,000 (females)
  • average superannuation rollover at preservation age estimated to be AUD$270,710 (males) or AUD$157,050 (females)
  • home equity, although substantial, cannot be sufficiently or effectively monetized

Counter-intuitively, the problem of an under-funded retirement is set to worsen further for younger Pre-retirees, due to a number of  emerging economic realities:

  • inability for younger people to enter the housing market (home ownership is projected to drop from 76% currently to just 27% by 2056
  • growing under-employment fails to maximise the benefits of superannuation over time
  • employer contributions to superannuation or mandatory/employer-based pension funds will never be set high enough to fully fund retirement
  • low interest rate environment post-GFC continues to penalise investors and savers
  • long period of low wages growth
  • longevity increases over time creating funding uncertainty and the risk of outliving retirement income

Of course, the exact amount of superannuation or pension balance needed varies according to individual circumstances and needs to be determined by an independent financial adviser.

Power of compounding interest

The World Economic Forum reports that the retirement funding gap is now increasing by 5% per year and highlights the need for Pre-retirees to focus much earlier on their future retirement funding.

“As people are living longer, they must ensure they have enough retirement funds to last them through their longer lives. This requires investing with a long-term mindset earlier in life to increase total savings later on.”

World Economic Forum

Han Yik – Co-Author White Paper(June 2019)

In real terms today and with average investment returns, workers can expect to spend $3 in retirement for each dollar they contribute whilst working.

What this highlights is the power of compounding interest – it makes maximizing your voluntary contributions, whilst still working, essential to a comfortable retirement.

The game-changer for Pre-Retirees

A new fifth pillar - Home Capital

Our Equity Preservation Mortgage® is used as the funding engine for Futureproof products that have been designed specifically to meet the needs of Pre-retirees wanting to better fund their future retirement.

Futureproof products use home capital in a different way, so as to create a new fifth pillar to retirement planning. 

We do this by funding new retirement strategies from home capital rather than after-tax cash dollars, for:

  • additional retirement assets
  • extra tax-free income
  • voluntary contributions to your superannuation or pension fund
  • purchase of a deferred annuity
  • purchase an insurance bond

To enable a Pre-retiree to be able to use home capital to fund these strategies rather than their after-tax cash dollars, can make all the difference.

The purchase of, or investment in, products designed to deliver future long-term income or retirement benefits is not usually at ‘top of mind’ for a Pre-retiree due to day-to-day financial considerations.  It is often simply too difficult for a Pre-retiree, who is mid-career or raising a family or facing high costs of living, to find the after-tax cash dollars to pay now for what are future benefits.

By using our Equity Preservation Mortgage® as the funding engine, Futureproof products will fund these retirement strategies out of home capital, with no equity depletion and at no cost or cash flow impact to the Pre-retiree. 

This breakthrough product innovation leaves the asset value of their residential property intact as the fourth  retirement funding pillar (to be later sold and cashed if needed) but, in the meantime, monetize the home equity efficiently and responsibly, thereby, creating a new fifth pillar of retirement funding – this changes the wealth management options for a Pre-retiree.

Futureproof Products for Pre-retirees

Futureproof Income™

Futureproof Income™ uses our Equity Preservation Mortgage® to monetize home capital to deliver tax-free income to Pre-retirees of any age.

Example

For an average Pre-Retiree who:

  • is 50 years old
  • owns a residential property
  • home value at median house price of $750,000

using the Futureproof Income™ product can secure $25,000 per annum in additional tax-free income until their retirement.

Futureproof Superannuation™

Futureproof Superannuation™  monetizes home capital to fund voluntary superannuation contributions whilst still working, instead of after-tax income – with no adverse impact to current pre-retirement cashflow and with no depletion of home equity. 

Many Pre-retirees rely heavily on another pillar of retirement funding – superannuation.  This third pillar of retirement funding will never be sufficient to fully fund retirement if relying solely on compulsory employer contributions.

Leaving yourself under-funded and with a plan to wait until retirement to sell the home (in order to downsize to free up home capital for investment or top-up a superannuation or pension account), is both risky and ‘too little to late’ due to:

  • self-insured investment risk in retirement
  • the superannuation transfer balance cap currently set at $1.6M
  • the strategy occurs too late in life to succeed as a retirement plan as it fails to maximise the growth effect of compounding interest over the long-term 

It is far better for a Pre-Retiree to make voluntary contributions during their 40-45 years of working life.

The non-concessional voluntary contributions cap of Pre-Retirees is currently $100,000 per annum.

However, it is well beyond the means of most Pre-Retirees to fund voluntary contributions each year from their existing after-tax income.  Now they have the option to monetize their home capital to top-up their superannuation.

Example

For an average Pre-Retiree who:

  • is 40 years old
  • owns a residential property valued at median house price of $750,000

using the Futureproof Superannuation™ product can top-up their superannuation account:

  • without having to directly fund cash contributions by salary sacrifice or from after-tax income
  • having no adverse impact on current or pre-retirement cashflow
  • with no depletion of home equity

at current average investment returns of industry superannuation funds, adding $1 million to their superannuation balance at retirement age.

Futureproof Pension™

Futureproof Pension™ monetizes home capital to fund monthly premiums for the purchase of a deferred annuity or insurance bond,  with no adverse impact to current pre-retirement cashflow and with no depletion of home equity.

The purchase of a deferred annuity is an alternate strategy available for Pre-retirees for improved retirement funding to deliver a pension upon their retirement.

The key advantage  of deferred annuities or insurance bonds over superannuation is, of course:

  • removal of longevity risk
  • certainty of income irrespective of investment performance

However, the monthly premium again has to be paid from after-tax cash dollars. Costs of living precludes most Pre-retirees from this effective strategy.

Example

For a Pre-Retiree who:

  • is 40 years old
  • owns a residential property at median house value of $750,000

using the Futureproof Pension™ product to purchase a deferred annuity or insurance bond:

  • without having to directly fund monthly premiums out of after-tax income
  • having no adverse impact on current or pre-retirement cashflow
  • with no depletion of home equity

will add a $25,000 per annum pension to their income in retirement.

Contact us for more information about our Equity Preservation Mortgage® and  Futureproof financial products.