We can never know too much about the positives and pitfalls of retirement. Financial planner Emmett Wilkinson explains five key concerns, plus some topics you might want to discuss with an adviser.
Two retirement myths
1. The retirement sweetspot
The financial community often talks about the retirement sweetspot – the concept of having sufficient financial assets yet still being eligible for an almost full Age Pension.
For example, a couple who are both aged 66 and with financial assets of $400,000 plus $40,000 in cash could expect to receive an Age Pension in excess of $30,000 per year. Using fairly conservative earnings assumptions, the investments can deliver $28,000 per year (indexed to inflation). Thus, the couple will enjoy a retirement income of close to $60,000, which is comparable to the average Australian income after tax.
A problem with this model is that to achieve this level of annual payment from the investment pool requires drawing both investment income and capital; and the capital will be exhausted within 18 to 20 years.
While that is in line with the statistical life expectancy of a 66-year-old, it represents a risk to anyone living beyond that point. It also doesn’t allow for bequests or unexpected capital expenditure.
2. Retirees spend less
Another retirement myth is that retirees spend less than when they are working. This belief is at the core of a recent report from the Grattan Institute, Money in Retirement: more than enough, which argues that the vast majority of Australian retirees are financially comfortable.
There are any number of reasons that refute the concept of retirees spending less. This was true of the so-called ‘war generation’, but is anything but true for Baby Boomers. The only Baby Boomers who reduce expenditure in retirement are those who have to.
For those who have yet to retire, it would be dangerous to believe either of these retirement myths.
Retirement is not the time for taking investment risks
My father used to say that the best way to make money was not to lose it in the first place. A conservative guy – but the older I get, the more it resonates with me.
Ask yourself what’s more important to you when it comes to investing your savings. Is it preserving and protecting what you’ve got or is it trying to achieve high investment returns and accepting the volatility?
A common approach for people with superannuation income stream accounts is to have two to three years of annual income payments invested in the cash option and to draw down payments from this option. The balance is invested in the chosen investment option/s and is not touched during periods of negative investment returns, assuming these last for less than two to three years!
This strategy is often referred to as the ‘bucket approach’ and has supporters and detractors because during periods of good investment returns there is an opportunity cost involved. My opinion? It provides peace of mind to clients and I like it for this reason.
Retirement is also not the time to invest in Bitcoin, take up share market options, trading courses or get into property speculation or development for the first time.
Going guarantor for property or business loans for the kids can also turn out badly in retirement.
There are often no second chances with your retirement funds.
The revamped Pension Loans Scheme
The Pension Loans Scheme (PLS) is due to undergo major changes mid-year, which will broaden its availability. This scheme allows age pensioners to borrow against the value of their home and not make repayments until the property is sold.
The unpaid interest accrues and compounds, and will be taken from the proceeds of the home when sold.
The PLS is similar to a reverse mortgage, but borrowings can only be taken as fortnightly income payments and not as a lump sum.
The proposed changes include making the scheme available to anyone of pension age, whether they receive the Age Pension or not, and increasing the amount that can be borrowed.
Previously, full-rate age pensioners could not borrow under the scheme but they will now be able to borrow up to 50 per cent of their annual pension. Higher amounts will apply for part-pensioners and self-funded retirees.
The PLS interest rate is currently 5.25 per cent per annum, which is higher than home mortgage rates but lower than typical reverse mortgage schemes.
Retirees who are looking to top up their income or who are asset rich but cash poor, may be interested in the scheme. But to do so, they must be prepared to dig into the equity in their home.
My experience has been that Aussies in general are sceptical of reverse mortgages. Will having the Government as the provider reduce some of these concerns?
Aged care is expensive
For many, the retirement journey will lead to a period in residential aged care. Moving into care is expensive for most people.
Upfront fees, known as the Refundable Accommodation Deposit (RAD), range between $400,000 to more than $1 million. If you cannot pay in full, you are charged interest on unpaid amounts at the current government rate of 5.96 per cent per annum.
There are also ongoing daily care fees that will vary according to the resident’s assessed financial means. Ongoing fees can be as little as $18,490 per year or as high as nearly $60,000 per year in some instances.
Dealing with these costs requires major financial decision-making and, for many, these are made in a crisis environment. My advice is to plan early and ensure that Enduring Powers of Attorney are in place.
Issues can also arise with wills, so make sure that your will is valid and current.
And finally: a journey not an event
Retirement is a major life change for most of us and makes us review most aspects of our lives.
Try to plan ahead. Any plan has to be based on assumptions and these will always be challenged by reality. It is therefore vital that a review is an integral part of the plan, particularly with regard to finances.
You should develop a relationship with a financial adviser who specialises in retirement planning. A good adviser will discuss such things as:
- how your super or investments have performed and how they can be expected to perform going forward
- is the approach/risk that you are taking still appropriate?
- what are your likely expenses over the next 12 months? Can you spend more or should you spend less?
- how are you affected by changes to super, tax or social security rules?
- have there been any changes in your personal or family situation that will have an effect on your financial situation?
Emmett Wilkinson is a Certified Financial Planner who specialises in providing advice on aged care and retirement planning at Advisersure Pty Ltd in Melbourne. He has worked as a financial planner for 20 years and previously worked for the Australian Taxation Office and the Reserve Bank of Australia. Advisersure Pty Ltd and Emmett Wilkinson are Authorised Representatives (424041/319614) of MyPlanner Professional Services Pty Ltd AFSL 425542.