Explaining ETFs: How retirees use them to invest for income and growth
A huge podcast and Prime Timers newsletter - packed with more than just the podcast this week, and each week from now on.
Today we’re talking about the very hot investment topic - ETFs or exchange traded funds. We’re going to dive into what they are but also how all generations, and most particularly, modern retirees are using them to invest for income and growth.
So this week I’m chatting with Senior Financial Adviser and State Manager for Queensland of investment firm, Ord Minnett, David Lane. And we’re truly demystifying ETFs.
LISTEN HERE:
Here’s some of the things we talk about in this week’s edition of Prime Time:
What is an ETF and how does it work?
How is an ETF different to a listed investment company and why do people invest in each?
Why have ETFs become so appealing?
We discuss using ETFs to get global exposure into their portfolio in a way that’s reported in Australian dollars. And, the different ways that ETFs are being used to get access to a range of different assets that might have been difficult to invest in previously.
How ETFs work when companies leave or join an index.
Capital returns and dividends, and how people benefit from both the growth in the value, and the income generated via dividends and franking credits.
ETFs grew out of investment crazes of younger investors, and became a product that was promoted heavily but they’ve really come of age. David talks to how large and small investors are using ETFs today.
How can ETFs be used inside and outside of superannuation, and why you’d invest in them inside super.
The one hitch for ETFs that you should be aware of.
What sort of advice should people be getting when they invest in ETFs. We discuss the risks, the exposure and the considerations people should have.
ETFs - and how they are now available for purchase through many of the superannuation fund’s direct investing platforms.
Are ETFs a boring and vanilla way to diversify investments or are there more exotic ways to use them? We discuss some of the less mainstream types of ETFs now available.
Let’s talk more boring investing. As we look toward retirement how do we get reliable income streams, exposure to growth, but a greater level of ‘good-boring’. David discusses fixed interest, hybrids and indices.
Investing in listed property and real assets through ETFs. What’s available and how does it match up against physical property returns? We consider income from a rental property versus the income from a listed retail fund.
Then we talk about key investment themes that David is exploring right now, and where he’s using ETFs at the moment.
The cost of ETFs. And the other costs that wrap around it.
And finally, David answers a couple of questions from the Prime Time / Epic Retirement community.
QUESTION FROM JILLIAN: We are going to rely on ETFs to fund our lifestyle before we have access to our super and then when we reach preservation age and before we go into pension mode. Do you have any general strategies to suggest to Jillian to get the best tax results and are there any rules and regulations she needs to think about or be aware of?
QUESTION FROM JENNY: I just retired at almost 59, which ETFs would give me good returns, but hold their value until I was I was able to access super at 60?
One big final question from me: How do we save and invest for our pre-retirement and retirement years, so we can hit our Prime Time and choose if we want to work? And how do we build those investments that will fund us before we can access superannuation?
From Bec’s Desk
Hey Primetimers!
It’s Thursday already. And this week the wonderful people at The Age, The Sydney Morning Herald, the Brisbane Times and WA Today asked me to write a ‘special feature’ on superannuation. It’s a great foundational piece. It’s designed to answer a lot of the questions that people want to know about their super as they approach retirement but are often embarassed to ask. I thought it might be interesting for you to read this week! Check it out below…
And, below the article I have included a cracker of a letter… from a Prime Timer. It’s a great question!
Keep sending in your letters. I am loving reading them and responding where I can.
And please - hit subscribe on your chosen podcast platform and leave us a review on the podcast on Apple, Spotify or wherever you listen to it. It’s really a big help as we spread the Prime Time word!
Cheers, and until next week ‘Make your Prime Time count!’
How do I get my super when I retire? And how much will I need?
This article was first published as a special feature in The Age, and The Sydney Morning Herald in both print and digital on Wednesday the 19th June.
Superannuation is one of the essential ingredients of a great retirement, but for many it’s also the source of many questions.
So let’s walk through a simple lesson on superannuation for modern retirement – how it works, how much you need, and how you can put it to good use.
Two phases of superannuation
Superannuation has two main phases: the accumulation phase, where we build up our fund balance, and the retirement phase, where we spend our savings.
During the accumulation phase, employers contribute to super funds on behalf of employees, who can also make additional contributions. Concessional contributions up to $30,000 per year from July 1, 2024, are taxed at 15 per cent, while non-concessional contributions up to $120,000 per year are taxed at the marginal rate.
These contributions grow over time but remain inaccessible until retirement, with few exceptions, allowing the funds to grow powerfully through compound investment. Hailed by Albert Einstein as “the eighth wonder of the modern world”, this underpins superannuation.
Through it, investments experience exponential growth as returns are reinvested year-on-year, and additional funds are added through contributions, too. A 7 per cent compound return doubles the initial investment every 10 years, not accounting for additional contributions, while a 10 per cent return doubles it every seven years.
Moving into the retirement phase
In the retirement phase, you can start drawing from your superannuation fund. This can be done at regular intervals or as lump sums, and you typically kickstart the process by providing your fund with a designated form and proof of identity. You also need to have met one of the conditions of release, typically turning 60.
Moving into the retirement phase involves opening a retirement phase account. You can move up to $1.9 million – which is the current transfer balance cap from the accumulation phase, where you pay 15 per cent tax on earnings (up to $3 million) – into the retirement phase, where you pay no tax. If you have more than this amount, you simply keep it in the accumulation phase.
You then allocate it to a selection of retirement investment products – including the most popular type, an account-based pension – and other products like annuities and lifetime income streams that are expected to become more popular as we live longer.
Many funds also offer a “transition to retirement” account that you can access after the age of 55 if you meet a range of criteria, like moving into part-time work. This allows you to access a limited income stream from superannuation to help you adapt to retirement over time.
Once in the retirement phase, you must meet compulsory drawdown rates set by the government. For those under 65, the rate is 4 per cent of their balance; it increases to 5 per cent for ages 65 to 74, 6 per cent for 75 to 79, and continues rising with age. This ensures superannuation funds are used to support living expenses, rather than being hoarded.
Most superannuation earns 50 to 60 per cent of its lifetime total during retirement, thanks to the power of compounding on larger balances. Even if you draw down 5 to 6 per cent annually, most funds earn more, allowing the balance to grow unless withdrawals exceed earnings.
How much super do I need?
The Association of Superannuation Funds of Australia (ASFA) provides a commonly referenced suggestion that single retirees need about $595,000 and couples $690,000 in superannuation when they retire to live comfortably.
This assumes home ownership, access to a partial age pension and no other income. As of March 2024, ASFA projects that a single person needs $51,630 and a couple $72,663 annually to live a comfortable retirement.
They offer a lower benchmark for a more modest retirement, with people who are eligible for the full age pension said to be able to afford an annual income of $47,387 for couples and $32,915 for single people, with just $100,000 in superannuation at retirement if managed carefully.
What about the pension?
When we retire we usually move from earning one pay cheque to living off several sources of income. These might include income from superannuation, the age pension, investments outside superannuation and income from working. About 62 per cent of Australians over 67 draw some form of age pension.
This article continues (it’s actually a really long feature) so jump on over to The Age, and The Sydney Morning Herald for a read of all of it.
Letter: Is the potential cost of advice worth it?
Hey Bec, My wife and I have just started to plan our retirement journey, I am 57 and she is 55. I am a public servant who will get a defined pension from age 60 and my wife is a primary school teacher.
We are about to meet with a financial planner to discuss a potential plan. We have been quoted roughly $4500 to get a plan put together, with ongoing costs of around the same.
Does this sound about right? The VA planner works for a large national reputable financial and retirement company and the plan is supposed to be ongoing with regular check ups.
I have started looking into planning myself and have already realised how complex it can be.
Just want to know if the potential cost is worth it?
Regards, Ken, Springwood NSW
Hi Ken
I can’t give you advice, but I can give you some inspiration and information. It’s a great question and one I think a lot of people want answered!
Advice performs a critical role in preparing for retirement. I think there’s three things to ask yourself as you try to evaluate whether the type of advice you are considering is worth it …
Here are three key things to consider when evaluating the value of the advice you’re considering:
Type of Advice: Are you looking for a one-time strategy to manage and reposition your money for retirement, or are you seeking ongoing investment management? The type of advice you need can significantly impact the cost and complexity.
Management and Costs: If you’re planning to actively manage an SMSF or move away from a profit-for-members fund, be aware of all the ongoing costs beyond the initial $4500. These include platform fees, investment costs, and SMSF maintenance expenses. Active management typically involves more than just the upfront fee.
Superannuation Fund Offerings: Have you thoroughly evaluated the retirement offerings from your super fund or others? Many funds offer less expensive and less complex investment options, which might suit your needs without the higher costs associated with more aggressive or complex investments managed by financial advisors.
I have written a long long article here about financial advice. Don’t get me wrong - I am a user of financial advice. I just think it’s crucial to weigh the costs and benefits, especially if you don’t have a large amount under management. Understanding your options empowers you to choose the right service providers and ask informed questions.
Article here:
One thing is really clear, all types of quality advice are important to help our incoming retirees navigate modern retirement. And knowledge is power - when you understand the types of advice and investing available to you, and at what costs they come, you can actively choose the right service providers and ask the right questions.
Best of luck! Bec Xx
Hey there! A quick and important note
The content in this newsletter and this podcast is for your general information only. It’s not financial, legal, or professional advice. I do my best to keep things accurate, but there’s no guarantees. Before making any big money moves, please chat with a qualified and experienced advisor. I can't take the blame for any mishaps from relying on this information - nor can Epic Retirement, Nine or other related companies. Stay savvy and always do your homework!