Noel helps ‘constrained’ retirees

The case study presented here describes a possible scenario for members of YourLifeChoices’ ‘constrained’ tribe, that is homeowners receiving a full or part Age Pension who spend at least $43,800 as a couple or $24,200 as a single.

My responses are indicative of what may happen in the future and a guide to possible strategies. Retirees should closely examine their affairs at least once a year to ensure that their investment strategies are on track and their estate planning is up to date.

Retirees also face the juggling act of having part of their assets in growth, where volatility is the norm, while keeping enough cash on hand for at least three or four years of planned expenditure.

I am happy with assuming returns of around seven per cent for superannuation, but members must understand that this is a long-term average. For example, a fund may return 12 per cent one year and two per cent the next.

YourLifeChoices members should make themselves familiar with the calculators on my website, They are simple to use and great for modelling possible outcomes.

For example, the Retirement Drawdown Calculator lets you model your retirement drawdowns and the Compound Interest Calculator allows the user to work out the growth of his or her assets.

The Stock Market Calculator allows users to enter a notional sum, invested on a starting date of their choice, and find out what they would have had on a given closing date if the investment they chose matches the All Ordinaries Accumulation Index that includes income and growth.


Many retirees are concerned about low rates on term deposits, but it’s important to understand that if the term is short, the rate does not have a big impact.


Case study 
Constrained Couple (homeowners on an Age Pension)
Joan and Brian

Ages: 72 and 74

Retirement Affordability Index estimated expenditure: $43,818

Couple’s estimated expenditure: $48,500

Mortgage: Nil

Superannuation: $322,000 (combined)

Shares: $12,500

Cash: $80,000 term deposit (1.5 per cent interest)

Wages: Nil

Age Pension: $33,500 (combined)


Q. Joan and Brian
We thought we were living within our means, but we are spending about $48,500 per year. We are earning very little on our term deposit and are worried that we can’t sustain this for much longer. How do we better arrange our affairs? Would an annuity work as we think it is now part of the assets test? Can you help us to understand how long before we will consume all our capital? Is there anything we should be doing to maximise our income and stretch our savings?

Noel says: Joan and Brian are currently assessed under the assets test because their total assets are $434,000 if we add $20,000 as the value of assets such as cars and furniture.

Pensioners should note carefully that for assets test purposes, items such as furniture and cars are not valued at replacement value but at garage sale value. This puts a limit of around $5000 on most people’s furniture, while cars should be valued as if they were being sold for cash to the local car dealer.

I assume Joan and Brian’s superannuation will be in pension mode, which means they are required to make minimum annual withdrawals. The requirement is currently five per cent of the balance, but this will rise to six per cent of the balance when they are aged between 75 and 79. This makes the annual drawings from super $16,100 a year. Add in the $33,500 Age Pension and the total income should be about $49,600 a year. This means that they should not need to draw from their savings to balance the budget.

If we then run the numbers on their superannuation, using an earning rate of seven per cent per annum, we can see that at the end of five years, the balance should be about $354,000.

At the end of five years, their shares should be worth around $19,000 if they have left them untouched and have reinvested all dividends. They will also receive a small cash bonus from the refund of franking credits.

I don’t believe an annuity is an appropriate choice because they would be locking in today’s low rates of return for the rest of their lives. In any event, they can create their own annuity by simply drawing down on their superannuation.

It’s important they ensure that this superannuation is in one of the better-performing funds. The rate of return, and the fees, are the two major factors that determine how long their superannuation will last.

It is important that they take good advice to ensure they are optimising the returns from investments, and advising Centrelink if and when their balances reduce, because every $10,000 reduction in assets is worth an extra $15 a week in Age Pension. They should also make sure that they have non-financial assets such as furniture and motor vehicles valued as low as possible.

Next week, Noel helps a ‘cash-strapped’ retiree.

Noel Whittaker
 is the author of Making Money Made Simple and numerous other books on personal finance.

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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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