Portfolio Rebalancing in Times of Turmoil

The events since the Global Financial Crisis have brought home to investors a new sense of soberness that might not be forgiven/forgotten for decades. There has never been such a prolonged adjustment to portfolios, and retirees have been shaken more than most.  Three years into the crisis, retirees are now beginning to run very low on cash and fixed interest from which to draw pension payments and are looking at their strategy on a portfolio level.

These are the scenarios they are faced with:

1. The retiree who structured their portfolio with equities/property and only a small portion of cash – less than 15%.

Outcome - These investors probably have exhausted all their liquids already and have had to make tough decisions as to which growth assets they had to sell down to cover next year’s pension payments.  The fact the assets they had to sell were severely depressed would have added salt to the wound.

1. The retiree with most of their funds invested into a single balanced managed fund.

Outcome – Right from the beginning a portion of this managed fund would have been sold down on a monthly basis to make each pension payment. As every growth asset has been down turned since 2007, they would have been sold at a loss.

1. The retiree who structured their portfolio using the ‘Bucket’ strategy, that is - up to 3 years of pension payments are invested into cash, and another 3 years of income payments are invested into conservative investments, and the remainder is allocated to growth assets.

Outcome – These investors have just about exhausted their cash pool and are now looking at where next to draw payments from. They do not need to sell down their growth assets yet. They can now source their income payments from the conservative pool and they still have a number of years to give their growth assets a chance to recover sufficiently to rebalance their portfolio.

Looking back it might be easy to forgive the first two retirees, markets had performed outstandingly leading up to 2007, and as always before a major correction all the clues were drowned out in the exuberance of the moment. But for those who are now leading into retirement, it is a powerful reminder of the importance of proper retirement portfolio construction. And those already retired should look to examine their current structure with a view to modify when practical. It’s looking increasingly like any meaningful recovery could still be some way off.

Click here to read a previous article/case study on this >>

Centrelink Review Leading into the holiday period some pensioners may be heavily dependent on their Centrelink payments. I have summarised when payments normally due, will be actually paid.

Normal payment delivery date	Revised payment delivery date	Next normal payment date
Wed 22 December	Wed 22 December	Wed 5 January
Thurs 23 December	Thurs 23 December	Thurs 6 January
Fri 24 December	Thurs 23 December	Fri 7 January
Mon 27 December	Fri 24 December	Mon 10 January
Tues 28 December	Fri 24 December	Tues 11 January
Wed 29 December	Wed 29 December	Wed 12 January
Thurs 30 December	Thurs 30 December	Thurs 13 January
Fri 31 December	Fri 31 December	Fri 14 January
Mon 3 January	Fri 31 December	Mon 17 January
Tues 4 January	Tues 4 January	Tues 18 January
Tues 25 January	Tues 25 January	Tues 8 February
Wed 26 January	Tues 25 January	Wed 9 February

Assets and Income Test reviews

Centrelink has always been very quick to remind you to update them with any change in value in your portfolio so they can re-assess, especially when the markets were performing well. This also means that whenever your portfolio goes down in value you should notify them promptly. As a majority of affected retirees are caught under the assets test, it could result in a small increase in benefit if you do.
For those tested under the income test and receiving a foreign pension, you may find the strengthened Aussie dollar has reduced those payments and you may be entitled to some extra Centrelink benefit. Please contact Centrelink to check.
Some Self-Funded retirees may even find themselves eligible for a small part-payment now that their assets have declined in value.

Currently the limits are:

Pension Disqualifying Assets Limits
Family Situation	Previous Amount	20 Sept 2010	Increase
Single, homeowner	$649,250	$659,250	$10,000
Single, non-homeowner	$780,750	$790,750	$10,000
Couple, homeowner (combined)	$963,000	$978,000	$15,000
Couple, non-homeowner (combined)	$1,094,500	$1,109,500	$15,000
One partner eligible, homeowner	$963,000	$978,000	$15,000
One partner eligible, non-homeowner	$1,094,500	$1,109,500	$15,000
Illness separated couple, homeowner	$1,193,000	$1,213,000	$20,000
Illness separated couple, non-homeowner	$1,324,500	$1,344,500	$20,000

If you feel the value of your assets (not counting your home) have fallen below the above thresholds, then it is important you contact Centrelink to be assessed.

	Super Co-contribution Payments I have spoken with a number of pre-retirees who have been taking advantage of the government’s generous co-contribution scheme. This scheme allows you to make an after-tax contribution to your superannuation and they will match it with a free contribution. You must be less than 71 years of age before the end of the financial year.

Time Frame	Lower income threshold	Upper income threshold	What will I receive for every $1 of eligible personal super contributions?	What is my maximum entitlement?
1/7/09 to 30/6/12	$31,920	$61,920	$1, up to your maximum entitlement.	Your maximum entitlement is $1,000. However, you must reduce this by 3.333 cents for every dollar your total income, less allowable business deductions, is over $31,920, up to $61,920.

The Logistics

You make your contribution to an approved superannuation fund or Retirement Saver Account (RSA).  Your fund reports all such contributions to the Australian Tax Office linked with your tax file number.
Once your tax return has been received and accessed and you qualify for the co-contribution, the Tax Office then makes payment by remitting the appropriate amount to the superannuation fund that you made the contribution to.

Problems

On a number of occasions I have encountered the situation where a pre-retiree has lodged their contribution over several years, but not completed their tax returns yet. And in the meantime, they have retired and rolled over all their superannuation to an Allocated Pension retirement income stream. Once their tax returns have been assessed, the Tax Office then sends the co-contribution to their super fund, but what if it is returned as the super fund is now closed.
What happens next? The Tax Office then sends a letter to the contributor asking them to nominate an appropriate super fund to receive the payment. But the retiree doesn’t have one.
Solution

There are several ways to deal with this. Firstly, the retiree could approach their bank and open a new RSA and give a copy of the letter to them to claim the payment from the Government on their behalf. Once received you can then cash out the superannuation if you are over age 65 or have satisfied a trigger of release. If you are aged 65 or older and retired, there is an alternative that the ATO does not tell you about. You can obtain a form from the ATO to make a direct payment in this circumstance and it will save you the trouble of opening an account you may not want. It will not be easy to find this form on the ATO website, so click here for your copy >>

Book a consultation with Paul Jackson by calling free call 1800 804 296 or book online

The Comedic side Life

Credit The preferred method of acquiring money for people who are too timid to steal and too proud to beg Derivatives Financial weapons of mass destruction (Warren Buffett) Ear marxist A congressman or senator who adds earmarks to congressional bills (American Dialect Society) Economist An expert who will know tomorrow why the things he predicted yesterday didn't happen today Forger A person who gives checks a bad name Home A real estate agent's word for a house (Robert Hirst) Income tax Capital punishment Inflation A situation in which no one has enough money because everyone has too much money

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