Pensioners will live to 90 - the sky is falling in

The SPIN by the govt that Pensioners are living longer and that will cause an "explosion" in Age Pension is as old as the Pyramids.  But in recent times it was done by Costello in 2005 and Hockey in 2015.

Here is Costello TRUTH

Here is Hockey TRUTH

If you look closely at age 65 you will see there IS a minute difference, but NO the sky is NOT falling in - that is simply lies and spin, spin and lies BUT most Australians believe it.

These figures are not something plucked from a Google search but the ACTUAL figures used in the Social Security Legislation.  For obvious reasons that use was REPEALED on 1 Jan 2015 but is still used by 97.47% of Pensioners.

So these graphs show we ARE orderly in the way we die, but if you want to see TOTAL MISmanagement please feast your eyes on the CPI graph since 1970.

Now THAT is incompetence, and by both Tweedle Dee and Tweedle Dum - makes no difference folks who you back.

Grandfathering Explained

There have been quite a few people who have tuned in to THIS thread at Whirlpool Forums and in a way THAT starts to prove Murray wrong, ie even though 84% of people are not confident in Retirement matters, at least they are TRYING.

So while I created a "fishing trip" to prove to myself that the Abbott govt would jump in with the same damage control methods as Abbott's mentor Howard, there are obviously some people out there that genuinely want to follow the issues here but are not able to interpret the graphs I supplied at my blog.

Of course as soon as it looked like some people were understanding what the govt DID with Grandfathering the thread was LOCKED, so for those that simply want to understand the numbers, please read on.

So I (we) will explain in words and numbers via a typical example, and I welcome any constructive input from those that "were sent" to ridicule me.  However let me explain that when I say I have done an analysis over 20 years, it is actually 21 as it goes from 65 to 85 inclusive, and by coincidence that is the exact same female life expectancy figure used by the Govt in the scenario we call "Grandfathered".

We use a single female (we call Agnes) with $400,000 in Super at 65 to align with the Murray Report example.  We add another $25,000 for car and contents and use a conservative 8% growth rate as well as a 3% "CPI Increase" as normally recommended "to keep up with inflation".

We then do two scenarios

Scenario 1.  Agnes applies for an Age Pension in Dec 2014

Scenario 2.  Agnes applies for an Age Pension in Jan 2015

Then we assume she gets advice from a financial planner (George) who is totally competent and can work with complex mathematics, AND is NON aligned to the Super Fund Agnes uses.

I will then start from the end result and work back to explain the result.

The result is Agnes loses $127,026 if she comes under Scenario 1.

The maths starts by explaining that the formula used in Scenario 1 takes the $400,000 Super, converted to an Account Based Pension and divides it by the Life Expectancy of Agnes which is 21.62, giving her an Income Test Free Amount (ITFA) of $18,501 pa.  In my submission this equation can have no other purpose by the govt than to spread the Super evenly over Agnes's expected life.

So Agnes asks George (in Dec 2014) to tell her just how much she needs to Drawdown in order to do that exact same thing, ie use up her Super in 20 years.  George tells her it is $31,624, escalating at 3% pa for her nominated CPI Increase.

He then explains that because her Drawdown is some $13,000 above the ITFA the Maximum Age Pension of $21,988 pa is reduced to $17,514, but he further explains that her Assets eclipse that and reduce the Age Pension to $13,263 which gives Agnes 60.3% of the Maximum Age Pension for Year #1.

George then explains that if she waits till Jan 2015 for her application the Asset Test will be the same $13,988.  He then explains that the Income Test will be totally different as the life expectancy formula will be replaced by Deeming, and that in any case the result of $17,435 is still well short of the Asset Test, "so no difference Agnes, apply when you like".

But as good as George is in his job he still only looks at one year at a time, so is unaware of how the maths works out as the years go by.  But we have the LOPS, a Cloud App that looks at the WHOLE picture and identifies the $127,026 loss to Agnes if she applies before 1 Jan 2015 (which she did).

Let's look at just one example to show why this happens ie at age 80.  The capital amount has reduced now to $217,219 so the Asset Test says $20,412 pa, ie about 93% of the Maximum Age Pension.  However the Drawdown is $49,269 pa so is more than double the ITFA, and the result is the Age Pension amount is just $8,691, ie less than 40% of the Maximum Age Pension.

The overall result over the 20 years is 49.63% of the Maximum.

If we then look at age 80 for Scenario 2, the Asset Test is of course the same at $20,412 BUT the Income Test is now at $20,633, almost the same, so Agnes is getting 93% at age 80 instead of 39%.

The 20 year result is now 77.15% of the Maximum Age Pension, ie $127,026 MORE over the 20 years.

This post does not attempt to determine if this is a deception or merely a mistake by those that drafted the Scenario 1 legislation.  The facts are that that legislation was REPEALED and there can surely be little argument about that, even though the Explanatory Memorandum did not EXPLAIN why as it is meant to do.

But the decision to allow the repealed legislation to "linger" via what is termed "Grandfathering" raises the most extreme questioning of the government's motives, and the fiddling with the Acts Interpretation Act (1901), the "Sister Act" to The Constitution, at the same time simply makes matters worse in my submission.

So, as I have already asked the government, please (anyone) show me that there are faults (of significance) in my maths above or show me an example where Grandfathering is beneficial to the Pensioner.  So far there has just been deadly silence.

That silence also extends to my estimate of the overall damage to the government of $10 Billion pa which I calculated on the conservative side.

But deception or mistake aside, the Sword of Damocles hanging over the government is that the $10 Billion pa can be restored to the Pensioners simply by knowing the facts and voting with their feet to "Throw Grandfather Overboard" to use the popular expression.  That is to say there is no need to mount an expensive Mabo type High Court challenge, as the solution is "built in" to the legislation simply by the Pensioner electing to "sweep" their existing Account Based Pension and starting a new one, free from Grandfathering.

Maybe it is the Georges of the system that need to explain this to their clients, now that they know the problem.

EDIT  It would be recalcitrant of me not to also do the maths for Robin as a Male, by changing Gender to M, we see that a Male would get an extra $106,550 over 20 years by switching to Non-Grandfathered, ie Grandfathering deprives a Female of $20,526 MORE than a Male, simply because the Sisterhood lives longer than the Brotherhood.

So once again it is easy to see WHY the govt was forced to REPEAL that formula, ie based on gender equity alone, and I don't think anyone could have any qualms about that 45 years after we were required to embrace Gender Equality.  The only issue is why allow repealed legislation to "linger"?

Smart Retirement - Take 3

Well this option is hardly what you would call smart but I am just informed at a Forum that it is a favourite of "certain" Financial Planners, who have done a Cloud Atlas type deal with the kids to do a "dash for the cash".

The option is for the Pensioner to DrawDown ZERO and just let Super accumulate (ie not take out an ABP that insists on a Min DrawDown).

So after 20 years there is well over $1 million in Super to be divided up between Financial Planner and kids, but the trouble is that the Age Pension is reduced to just 26.43% of the Full amount over 20 years, AND it is all up front ie reducing to half at age 70 and cutting out totally at 75 (ie no income and no health care).

The Pensioner would have an average of about $6,000 pa on which to "live" so would need to do without things like heating and food, so really this "eugenics" or culling is right up the alley of Tony Abbott's Final Solution as Health Minister to this Age Pension problem in 2005 (see below).  So he would probably die off at about 72 with about $400,000 loot to divide up.

It's NOT a plan we would suggest to a Pensioner but those are the maths involved.

TONY ABBOTT: "If you are to see on the front page of the newspaper headlines such as: "50,000 dead", or "50,000 to die", obviously people are going to start thinking the worst. On the other hand, if you work out that that translates to something like a one in 500 risk of succumbing to a flu pandemic, I think you are able to put it into a different kind of perspective."

Smart Retirement - Take 2

OK the post above is a lot to take in so I will start a new post here because I am about to once again explain the Big Grandfather Deception by the govt.

So far we have used the LOPS to show how a Retirement Income of DOUBLE the Age Pension is easily obtainable simply by having accumulated the Employer Contribution since 1990, and we mentioned that this Age Pension Application got snuck in just before Grandfathering came to be on 1 Jan 2015.

So given that the entirety of BigSuper called DOOM & GLOOM on those that came AFTER Grandfather, or those who were Grandfathered but had the temerity to do an Oliver and "ask for more", I am sure you will be saying I am not at retirement age so will I miss all this - boo-hoo?

Well the news is good as we pulled a little trick there and based the above result on NON Grandfather, so here is the sad news for those that bought the hype that "Grandfather is GOOD, STAY with Grandfather".

So for Robin as a bloke, under Grandfathered Rules he would get $57,518 LESS in Age Pension over 20 years.

As if that is not bad enough, for Robin as a gal she would get $75,671 less, so you will be saying OMG OMG how is it possible Germain Greer missed this INEQUITY for 45 years after the small f feminist takeover of 1970?  Simple answer is Germaine and the sisterhood don't use spreadsheets so did not KNOW.

And then none of the "One Year Wonder" Financial Planners do either, or at least if they do, they don't look at 20 years.  So that leaves just the govt and myself that understand the horrible truth.  So one can understand it HAD to be repealed, but NOT accept that it be allowed to linger for another 20 years.

The reason the Grandfathered Test regime (now REPEALED but allowed to linger) has a real Sting in the Tail that jumps in at 75 years or so, works this way.

When you took out an Allocated Pension (changed to Account Based Pension) you were given an Income Test Free Amount which was your total account amount (minus any Lump Sums) divided by your longevity as determined by ABS.  On the surface that looked fair as you were essentially getting about 5% FREE, SO if you DrewDown the Minimum of 5% ALL of your income was Test Free.

BUT as you get older the Minimum Percentage goes up, ie to 9% at age 85, but the Test Free amount stays the same. So by 85 4% is NOT Income Test Free but is FULL INCOME under Income Test, so DOWN comes the Age Pension.

The bottom line is this is costing the Pensioners that can be INDUCED by SPIN to stay "Grandfathered" about $10 billion pa, or to put it the other way if ALL those existing Pensioners "swept" their ABPs and took out a new deal, then the govt would LOSE $10 billion pa for about 20 more years.  That is 25% of the present total Age Pension budget and enough to BREAK the budget if that Sword of Damocles comes SPINNING down (pun intended) on the feast.

Smart Retirement

There is of course a cutoff point for Super Amount that will also allow you to get a FULL Age Pension, so this post examines how that might be achieved using the case of a person (and we will look at difference between male/female) of 40 years in 1990.

First task is to see how Keating's Compulsory Employer Contribution could fund such Retirement, so we draw up a spreadsheet that starts with a $40,000 salary in 1990 and escalates it at 3% pa.

Then we use an average of 5% Employer Contribution, and finally apply an 8% Growth Rate year by year, extending into the Retirement stage.

So for that person (male/female Robin) we get about $225,000 in late 2014 (so as to sneak in before Grandfathering ended on 1 Jan 2015).  As you see all the figures were conservative so the total might be more like $300,000, but $225,000 is enough, to start to eat into the Age Pension especially as we give Robin $25,000 in other assets eg a car etc, and say he/she is a homeowner.

So that gets rid of the "Accumulation Stage" and we are at Square One of off to see Centrelink and to see what sort of "LIFESTYLE OPTIONS" one has with this small amount of Super BUT all of it from Robin's employer.

Now read on:

Unfortunately (as Murray Report tells us) "94% of Retirees convert their Super into an Account Based Pension, and the majority use the Minimum DrawDown".  So that is what we will do for Robin.

Alas, even at our conservative Growth figure of 8% pa the Capital of the ABP continues to grow and even as the legislated Minimum Drawdown starts to increase over the years, at the end of 20 years the balance is 150%, and remember that Robin started at a point of getting over 90% of the Maximun Age Pension in Year #1, but over 20 years that slips to 79.32%, a total loss of $95,894 over 20 years.

The news is worse with the 2015 Budget changes to Asset Testing and the loss then escalates to $136,584.

So not only is that a huge loss of income but remember it was CAUSED by taking the Minimum DrawDown, so we have the double whammy effect as shown by the Combined Income Stream.

So the Total Income Stream starts at about $31,000 pa in Year #1 and barely makes $38,000 by age 85, just 49% more than for the Full Age Pension alone, BUT this IS what the majority of people do.  The Total over 20 years is $688,768

So let's leave that dumbness behind and get smart.  We ask the LOPS to tell us how much DrawDown to totally exhaust the ABP in 20 years (ie 2 years past Robin's Use-By-Date as a bloke) and it tells us that $22,868 pa is that amount.

We put that amount into the LOPS and all changes for Robin in 2015 (we will look at Grandfather in a moment).  He now gets 97.57% of the Full Age Pension, averaged over 20 years.  That is just $11,339 short of 100% Full Pension for 20 years.

You say yes, but what of the effect of the Hockey amendments 2017?  Well, it is just $91 over 20 years BECAUSE this plan is depleting the capital AWAY from the Hockey jaws.

And for Total Income Stream this profile is looking way better:

We start at about $42,875 pa (equivalent to a taxable income of $50,968) and end up with a steady INCREASE at about $45,000 at 85.  The Total Income is now $930,733 over 20 years, a whopping $242,000 better than the "plan" (NOT) of the self named "financial adviser".

Robin's Total Income Stream over 20 years is now slightly over DOUBLE the Maximum Age pension rate, and all he needed to do was BE in the workforce from 1990 to 2015.  He didn't need to put a cent into Super.  All of that thanks to the long term vision of Paul Keating which should eventually see the end of the Age Pension as a govt concern.

In conclusion, IF you see yourself being able to live in the "lifestyle" you want on a Retirement Income of DOUBLE the Age Pension, then this article says you can do that purely by working 25 years with your employer's Super Contribution ONLY.

Or if you want a better lifestyle you can start to add your own Super to this scenario, but of course the Age Pension will decline, and if you want to know just how much please contact us for an assessment report.

Here are the graphs in more detail for the second Scenario above.

The Three Card Trick - Grandfather, Murray and Hockey

Amid the normal doom and gloom media hype that "we are living too long" the government's plan to REDUCE the Age Pension Bill now becomes perfectly clear.

On 1 Jan 2015 Grandfathering struck the First blow, threatening Pensioners all that doom and gloom if they deserted him, saving some $10 billion pa if the pensioners BELIEVED the hype.

Then the Murray Report did the normal "blame it on the Pensioners" as the Second blow, explaining that 84% of Australians don't give a toss about Retirement Planning, and leave it to "financial advisors" and Super Fund trustees (who Murray described as somewhat lacking).

Then in May 2015 Hockey announced the Third blow via a new "retraction regime" for Asset Testing, said to save less than a billion pa but in fact saving about $5 billion pa.

To explain how smoothly this worked we simply need to update my recent post.  In this recent post I examined the example case provided in the Murray Report, and you can read it here.

The bottom line says Justin has been convinced during his working life that he needs $400,000 in Super as a bare minimum at 65, but AT 65 that he not USE it for his own benefit but simply Drawdown the MINIMUM amount.  A new idea of the CIPR is touted but that is purely pie-in-the-sky nonsense to cover-up the above seting-up of Justin to rob him of Age Pension.

Our analysis using a SENSIBLE Drawdown gave him DOUBLE the income over 20 years, including $206,000 increase in Age Pension, plus about $40,000 decrease in Fund Fees

Also our information that Justin would be $72,163 WORSE off if he took notice of Big Super to stay with Grandfather allowed him to avoid that trap.

So 5 months down the line since the Grandfather tricks, Hockey has announced the 2017 changes to Asset Testing, so we have factored all of that into the LOPS and can give you an update on Justin.

Had he stayed with the Govt inducement to NOT use his hard earned super, his Age Pension would go from $163,337 over 20 years, down to $32,187, ie a DECREASE of some $130,000.

But if he followed our advice to enjoy retirement he would go from $369,236 to $322,843, a lesser decrease of some $46,000, so he would be some $290,000 better off than had he meekly listened to his "Financial Adviser".

Here is the comparison shown graphically:

The top image shows the effect of being convinced by BigSuper that "you are SAFE with Grandfathering" but alas "the sting is in the tail" and we see the Green Income Triangles eat into the Age Pension to give just 63.12% of the Maximum over 20 years.

The middle image shows that by ESCAPING Grandfathering Justin gets 79.96% of the Maximum.

But that is short lived and from 2017 the Budget 2015 New Rules say even with escaping Grandpa Justin now has the Age Pension reduced to 69.92%, which is not quite as bad as for Grandfathering at 63.12%.

So finally the Double-Whammy is BOTH Grandfather and 2017 New Rules and here is the image.

The Age Pension is now reduced to just 55.69%, some $122,000 reduction.

Notice how skillfully the Govt has combined the New Rules with Grandfather, ie New Rules hit up front from 65 to 75 while Grandfather comes in from 75 to 85.  So remember you can't avoid the New Rules but Grandfather is optional.

Well in fact you CAN avoid the New Rules to some extent if you go easy on accumulating Super during your working life (maybe just take the employer contribution?) and so the Govt is covering that in conjunction with BigSuper, especially SunSuper with extensive advertising and the Pronking of "The R Word".

Budget 2015 Update

The budget of May 2015 has included some substantial changes to the Asset Testing for Age Pensions, to commence in 2017.

We have therefore updated our LOPS to allow us to give you a very accurate figure on just what the changes might mean to you over 20 years, and for the first case off the ranks today the news was a $105,000 DECREASE in Age Pension.

So to get a Report on your own case simply fill in the Form