Can couples structure savings to ensure income for life?

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Superannuation is the key to decreasing reliance on the Age Pension. The Superannuation Guarantee, introduced in 1992, means most older Australians who are either retired or closing in on retirement have super. Obviously, the length of employment and salary affects the size of the nest egg, but no matter how big or small, maximising the value of your super is paramount.

That’s why we presented three financial planners with three case studies – one for each of our retirement tribes. Their challenge was to make their case study’s super go further. Hopefully, their strategies can inform you.

YourLifeChoices asked three financial planners to assist with three case studies, helping each to make their super go further. Adviser Michael Horan was set the task of helping Constrained Couple Jenny and Peter enjoy their retirement without fearing they would run out of money.

Case study 2 – Constrained Couple

Jenny (70) and Peter (72) live in Brisbane.
They are homeowners with no mortgage.

They have:
$200,000 in super ($100,000 each)
$20,000 in cash

Annual income NOW AFTER*
Super pension Annuity $10,000 $7,000
Annuity $0 $5533*
Full Age Pension and supplements $35,916 $35,916
TOTAL:  $45,916 $48,449

Retired couple Peter and Jenny* are concerned about maintaining their lifestyle without outliving their assets. In today’s low-interest climate, they are hoping to maximise their income without taking too much risk or seeing their hard-earned savings struggle to earn interest. They believe they can live very reasonably on $45,000 per year.

They have worked hard to own their home outright and have $200,000 in super ($100,000 each) with an additional $20,000 in ‘emergency’ cash. They have no other assets. They receive the full Age Pension (and supplements), all of which amount to $35,916 per year.

As such, they categorised as belonging to YourLifeChoices’ Constrained tribe, homeowners on an Age Pension with an estimated annual expenditure of $42,995.

Life expectancy
Based on current ages, Peter’s life expectancy is 87 (another 15 years) and Jenny’s is 90 (another 20 years). It is important to recognise that these estimates are averages and many other factors such as family longevity and health history will all influence their life expectancy.

The goals

  • Make the money last past Jenny’s life expectancy while maintaining an annual spend of $45,000.
  • Maximise fortnightly income while retaining access to the full Age Pension.
  • Manage risk and volatility in the portfolio.

Current projection
Using the super assets – 50 per cent is invested in cash and term deposits and 50 per cent in growth/risk assets such as shares – it is expected that Peter and Jenny can draw down their super but it will probably run out at about the limit of Jenny’s life expectancy, or just before.

This does not suit as it may lead to a shortfall if one, or both, survive beyond the projected expectancy.

Alternatives to consider
When considering options for Peter and Jenny, we don’t want to rule anything out.

Here are some alternatives my clients have proposed:

  • withdraw all the money and buy bitcoin
  • sell the home and buy another home for less in an area with reduced living expenses. This frees up more cash (and could be contributed to super using recent downsizing legislation)
  • rent the home and move to a low-cost country, for example, somewhere in Asia.

These alternatives were discarded because of the significant nature of the changes proposed.

Reasonable alternatives:

  • take slightly more risk in the portfolio and hope that the money lasts longer
  • consider a guaranteed lifetime annuity
  • reduce expenditure slightly each month
  • assume that as you grow older, you won’t require the same level of income.

Solutions
Based on not wanting to take more risk in the portfolio, as well as not wanting to either reduce expenditure or assume that expenses will reduce, we will explore a guaranteed lifetime annuity.

A guaranteed annuity takes a lump sum and provides a regular income for the life of the individual. There are options such as having a beneficiary receive the income for their life or receive lump sum death benefits within a certain timeframe.

An additional benefit of this solution is that it is not affected by market cycles. The market can go down by 20 per cent while the regular income will be retained. The negative aspect of an annuity is that you give up some control/liquidity of the cash and cannot access it the way you would with a normal super account.

Finally, while not relevant in Peter and Jenny’s case, annuities are treated favourably by Centrelink and aged-care facilities for assets and income testing.

Specifically, for Peter and Jenny, a solution would be a lifetime annuity using all of Jenny’s super ($100,000), with Peter as a reversionary beneficiary (to allow the regular income to continue to be paid to Peter in the case of Jenny’s death). This gives a regular income of around $461 per month or $5533 per year, which represents an income of around 5.5 per cent. This payment increases with inflation and continues for the entirety of Jenny’s life.

A change to the rules relating to annuities is set to come into effect on 1 July 2019. These rules will change the way annuities are assessed for deeming/asset limits. This example assumes the annuity is set up before 30 June 2019. Any annuities purchased by that date are grandfathered.

Outcomes of a lifetime annuity
In this scenario, we have managed to achieve all the outlined goals. Specifically, we have:

  • maintained (and slightly increased) current living standards well past life expectancy
  • retained full Age Pension
  • reduced exposure to growth assets and market volatility risk
  • structured assets in a way that is treated favourably by Centrelink and aged-care facilities, if needed.

Peter and Jenny can now rest easy, knowing that with these simple changes they have guaranteed themselves a portion of income for life while reducing portfolio risk.

This graph compares current total income with the recommended solutions. The black dotted line indicates that with no change, the money will run out before life expectancy (red line), while the light blue and green portions show the additional income from annuities and additional years of age pension.

* Peter and Jenny are not real people.

Michael Horan, AFSL No.343921, is a partner at CA Financial Services and has more than 15 years’ experience in accounting and financial planning. CA Financial Services is committed to creating win-win scenarios for clients who need help optimising their financial situation and to aligning solutions with clients’ life decisions and goals. Visit cafsg.com.au

Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

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Written by Michael Horan

1 Comments

Total Comments: 1
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    What we dont know is the nature of their expenditure. A rigorous budget and keeping a daybook of actual expendture for a few months might highlight some modest but significant expenditure that if saved and reinvested could materially improve the longer term outlook. We did this while paying of a mortgage, we examined and discussed evey week any strictly unnecessary expenditue and every dollar saved was paid off our mortgage reducing it by many years.


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