Day: February 19, 2022

If retirement’s on your horizon, you’ll be keen to make sure your plans stay on track. It makes sense to concentrate on things you can control, such as insurance.

Paying for more insurance than you need can eat away at your retirement savings, at a time when they’re more important than ever. Under-insure and one day you may find you need it and have to use savings or borrow money to help you get through hard times.

Cover for a changing life

If you’re considering what insurance you may need in the lead up to retirement, a good way to get started is to think about what you really need, and what you don’t.

Another approach is to make sure you’re holding the right insurance for the lifestyle you want in retirement.

Here’s a simple checklist that may help:

1. Ask yourself how much money your family would have if you were to pass away or become disabled.
2. Compare that with how much money your family might need in the same situation, including how they’d manage paying for day-to-day costs like mortgages or rent.
3. The difference between the two can help you work out how much insurance you may need.

Consider your existing cover

Dig out your existing insurance agreements, taking special note of when they’re due to expire and your continued eligibility for the policies they hold.

An important area for many Australians is insurance held in superannuation. These policies can come as part of our super account, and often have an expiry date.

Insurance in super

Insurance in super can help us out when we really need it. Like any type of insurance, it works best when you have the right level of protection for your situation. As you head towards retirement and your life changes, so might your priorities.

As well as Life insurance which pays a lump sum benefit if you pass-away, you might have Total and Permanent Disablement (TPD) in your super. TPD cover may provide you with a lump-sum payment if you suffer a disability that prevents you from ever working again.

TPD could help you pay for ongoing medical expenses, alterations to your home to make day-to-day life easier and help provide future financial stability.

Total salary continuance, also known as income protection, is designed to pay a monthly benefit of up to 75% of your pre-disability regular income if you’re unable to work due to injury or illness.

Typically, within super, Income Protection provides you with cover either for a two-year or five-year period or until you turn 65, depending on the terms of your plan.

What to look out for

There are pros and cons of insurance within super. Things to think about if you’re approaching retirement include:

• Cover through super may end when you reach a certain age (usually 65 or 70). That’s generally different to cover that’s outside a super account.
• Taxes may be applied to TPD benefits depending on your age.
• Claim payments may take longer, as the money is normally paid by the insurer to the trustee of the super fund before it’s paid to you or your dependants.
• It’s a good idea to make sure your super balance isn’t being reduced more than it needs to be, by your insurance payments. This is called insurance erosion¹1

Don’t double up and stay flexible

As part of your review, it’s also a good idea to check insurance you hold in super against other policies you might have outside super.

Then compare your cover, check whether you have any insurance double ups – if you have more than one super account with the same type of insurance, you may be paying for more insurance than you need. In particular, for Temporary Salary Continuance (TSC or Income Protection), you’ll most likely only be able to claim up to 75% of your pre-disability income (offsets may apply), regardless of how much you’re insured for or whether you hold it in two accounts.

As well as comparing the level of cover you get, consider any exclusions, such as the treatment of any pre-existing medical conditions, and waiting periods. Remember that if you do cancel your insurance, you might lose access to features and benefits and may not be able to sign back up at the same rate, or at all.

If you are applying for or reinstating your insurance, or are looking to make a claim, it’s also important to disclose your situation to your insurer honestly. Otherwise, the insurer may be entitled to refuse your claim.

Any changes in life calls for flexible thinking, whatever age you are. The lead up to retirement is a great time to review your insurance and adapt to changing circumstances.

©AWM Services Pty Ltd. First published Dec 2021

1 An inactive account is a super account that has not received any contributions or rollovers for 16 months. Learn more at https://www.amp.com.au/insights/grow-my-wealth/protect-your-super-package.

Looking at your spending in a new light could make a substantial difference to your financial future. The 50/20/30 budget rule works for one main reason – it’s easy.

New to budgeting? You may know how much money you make and have a rough idea of how much you spend. But do you know what you’re actually spending it on, or if your spending patterns will benefit you in the long run? The good news is, you don’t need complicated spreadsheets and formulas to get your personal finances in check.

Enter the 50/20/30 budget rule, a kind of yardstick to guide your spending patterns. The concept was popularised by bankruptcy expert and US senator Elizabeth Warren, who co-wrote All Your Worth: The Ultimate Lifetime Money Plan with her daughter, Amelia Warren Tyagi. The essence is to keep your personal budget simple: the easier it is to understand, the easier it is to stick to.

What is the 50/20/30 rule?

Needs: Ideally, you’d spend 50% of your after-tax income on essential living expenses, like rent or your mortgage, other loan payments, groceries, bills, insurance and transport.

Savings: Next, you’d channel 20% of your income into your financial goals, whether that’s building an emergency fund, boosting your superannuation or saving for a house deposit.

Wants: The final 30% of your money would be allocated to things that make your life a little more enjoyable but aren’t necessary to get by. Think new clothes, concert tickets, a holiday or a meal out with friends.

Consider the figures for needs and wants as a guiding principle – if you spend less than what you budgeted for in either category, the surplus can be channelled into things such as extra mortgage repayments, general savings or investments.

How to create a 50/20/30 plan

To put this budgeting plan into action, you need to have more than a rough idea of what you spend. Make a list and tally up your monthly expenses – remember to include averages for bills that might be infrequent – and then break them up into ‘needs’ and ‘wants’.

If you’re currently spending 60% of your income on needs and 40% on wants, you probably won’t be surprised to find you’re not saving anything for your future. Take some time to reassess where you can cut back to start saving more in each category.

• Needs: Can you get a better deal on your phone plan? Can you plan weekly menus to reduce your grocery bills? Do you need to take more drastic measures, like moving to a new house to reduce the amount you spend on rent or your mortgage?
• Wants: Can you go without takeaway coffee this month? Do you really have to go out to dinner three times a week? Is that new jacket a must-have?

One way to make sure you stay on track with saving money is by splitting your pay packet as soon as you get paid. You could keep your everyday bank account for your needs, for frequent and easy access. Then consider additional accounts, for wants and savings. Set up an automated direct debit for the day after you get paid, so that the cash split from your everyday bank account happens without you having to do a thing.

Why the 50/20/30 rule works

The 50/20/30 budget rule is popular because it may allow you to manage your money without making too many sacrifices. You pay your bills, grow your savings and still get to have some fun. It also gives you a way to look at your spending in a different light – would you have moved to a cheaper apartment sooner if you’d realised what a large chunk of your income your rent was consuming? Having a new perspective of what’s absolutely necessary can be refreshing and rewarding.

When the 50/20/30 rule doesn’t work

Like all rules, the 50/20/30 rule was made to be broken – in some situations. If you have a hard time separating your needs from your wants, you’ll probably find this form of budgeting tricky to stick to. And it can be downright detrimental if, for example, you have large debts but are still stashing away 30% of your pay for personal splurges. This is the time to consider shifting some of the money in your ‘wants’ column to your ‘needs’ column – not forever, but just until you get your spending on essentials down to a more manageable level.

©AWM Services Pty Ltd. First published Dec 2021