Get a reliable retirement income stream – and pay no tax on it
Financial worries can overshadow retirement. Over60 sat down with Michael Holmes, financial advisor and author of Super Smart Money: A guide to the most efficient retirement income streams for Australians for his top tips.
“Retirees should buy the golden goose and live off the golden eggs,” Michael says. “In other words, the ideal solution is where you take a weekly, fortnightly, or monthly ‘wage’ from the cash account within your investment portfolio, without ever selling off the assets so that they can continue to fill the cash account.”
Super is super
If you’re over 60 you can access your superannuation tax-free, there is no tax on your earnings through super and no tax on what you pay yourself from your super.
Michael recommends the SMSF (self-managed super fund) to his clients: “These offer the most flexibility and freedom, and I manage them on my client’s behalf to ensure they get the most out of their fund as possible. They’re so liquid and the money can be accessed any time if you need it.”
Don’t be afraid of shares
Even the word “shares” can fill many of us with dread. Surely the stock market is akin to gambling. But not if you follow certain guidelines, Michael explains.
“Within the SMSF, I would only invest in a niche of Australian industrial companies. We’re talking 20 companies out of a possible 2000 on the stock exchange.”
Michael advises you forget about share price and instead look at year on year performance. “Share price is only a guide of where a company is trading, but what fills your bank account is the profit and the dividends you’re paid,” he says.
There are certain companies that essentially give you a pay rise every year, without you lifting a finger, for example Commonwealth Bank of Australia and Woolworths. These companies fulfill the strict criteria Michael recommends you look for in investments:
1. High Return on Equity (ROE)
This is the amount of money the company makes from its assets. 15 per cent and over would be good. CBA makes 18 per cent.
2. Durable Competitive Advantage
This means the company must dominate the market they’re in, meaning your money is safe in the long term and is a reliable investment. This reliable cash flow gives you a realistic estimate of your annual investment income so you can budget accordingly.
3. Attractive payout ratio
Look for companies that, as well as satisfying the above criteria, pay out less than 100 per cent of their profits- ideally around 70 per cent. This means they plough 30 per cent of their profits back into the business, meaning they’re more likely to be sustained in the future while still giving you a healthy income.
4. Fully franked dividends
This means that the company pays the tax for you. So, for example, if you are paid 5 per cent on a $1million investment, that’s $50,000. But you also receive an additional $21,000 in tax refunds because the company has already paid the tax on your behalf.
5. Defies the Yield Trap
Having a high yield percentage figure can seem attractive, but it’s an abstract number and only captures a frozen moment in time. 9 per cent of one investment could easily pay you the same as 5 per cent of another. The key is to fulfill the criteria above and work out what you will likely be paid- in dollars, not percentages- from your investment. Know exactly what you own and what it’s worth, and avoid having your entire portfolio blurred into one final dollar value in a total return-style managed fund.
For more information see www.MHinvestmentmanager.com.au