Noel Whittaker helps these ‘affluent' retirees organise their finances

Could these 'affluent' retirees be better organised financially? Personal finance expert Noel Whittaker assesses their strategy and tells what they could change.

Noel Whittaker helps ‘typical retirees’ organise their finances

The case study presented here describes a possible scenario that would be typical of many of today’s retirees who fit into YourLifeChoices' 'affluent' tribe, that is, they are homeowners with private income whose annual expenditure is at least $76,000.

But it’s important to understand that all Australians, and particularly retirees, live with uncertainty.

For retirees, the main issues are the state of their health, whether or not their children need assistance, and the rate of return they can achieve on their assets given interest rates, inflation and changes to the superannuation and pension rules.

My response is 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, www.noelwhittaker.com.au 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 
Affluent Couple (homeowners with private income)
Sally and Andrew

Ages: 64 and 66

RAI estimated expenditure: $76,208

Couple’s estimated expenditure: $70,000

Mortgage: $100,000

Superannuation: $600,000 (combined)

Shares: $305,000

Cash: $45,000 term deposit (1.5 per cent interest)

Wages: Sally $15,000pa

Age Pension: Not eligible

•••

Q. Sally and Andrew
We are spending nearly $70,000 a year (slightly less than our retirement tribe but still a lot) and are worried that, given such low interest rates, we will burn through our capital. How long do you think our savings will last before we become fully reliant on an Age Pension? Sally earns about $15,000 a year as a part-time teacher’s aide and hopes to fully retire when she is 66. Can we organise our retirement savings better? What else should we consider?

Noel says: We don’t know what the repayments are on the mortgage, but at their age I would expect a five-year term maximum, which would take a big chunk of their money in repayments. Therefore, I believe it’s a no-brainer that they withdraw $100,000 from their superannuation to pay out the mortgage. This would reduce the balance to $500,000. If we put $30,000 as the value of their personal effects, their total assets for Centrelink purposes become $880,000.

This is just a shade over the assets test disqualifying limit of $863,500 for a couple.

I don’t think they should be adopting strategies to get a part Age Pension, because the shares should be growing by at least six per cent a year, which would equate to $18,000 a year. Therefore, it could be an ‘on-again off-again’ process for the Age Pension, depending on what the share market does.

Furthermore, a person who just scrapes in for the Age Pension is basically doing it for the Health Care Card. If we put the value of that at $5000 a year, I reckon it’s pointless to spend $30,000 to get under the cut-off limit for the Age Pension assets test. It would take at least six years to get your money back.

To allow for contingencies, it may be simpler long term to ignore Sally’s income and treat that as a bonus. Therefore, we could run the numbers based on living off their superannuation at the rate of $70,000 a year.

The next step is to make assumptions about inflation, the rate of return from the superannuation and the rate of return from the shares. For this exercise, I will assume that inflation is one per cent, the shares achieve eight per cent income and growth combined, and the super fund returns seven per cent.

If we run their superannuation through my Retirement Drawdown Calculator, we can see that on the assumption of an earning rate of seven per cent, annual drawdowns of $70,000 indexed one per cent, their superannuation balance should be down to $287,000 after five years.

But their shares are compounding, so after five years the share portfolio should be worth around $470,000. This would mean that their total assets then would be around $800,000, which should be under the pension cut-off point in five years. This, of course, assumes that there won’t be any major changes to the Age Pension asset limits or to treatment of the family home.

I don’t recommend any big changes, but they should watch their asset values and, if there is a market fall, get straight on to Centrelink, because they might become eligible for a part pension.

They should also keep at least three years of anticipated expenditure in cash to give themselves a buffer if there is a big market correction. Of course, any kind of casual work that either could do would be a big help to their finances, as would any savings they could make to their expenditure.

Next week, Noel helps a 'contrained' retiree couple.

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.





COMMENTS

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mogo51
12th Feb 2020
9:57am
Noel Whittaker is very astute.
johnp
12th Feb 2020
10:54am
All fairly logical and nothing new here !!
Tuesday127
12th Feb 2020
11:02am
This article doesn't seem to take into account share dividends and Franking. On my calculation using my own portfolio ( not as big as $305k ) they should get a return of around $20k pa so the Super drawdown instead of $70k would be around $50k so the super would last longer, not even mentioning that the super would grow at the same rate as the shares ( mine does, I have more in super now than when I started and I draw 7% pa).I'm also not sure about needing $70k to live on, when I retired after earning $130k pa I wondered how the hell I would live on approx. $57K pa but found it easy, our costs had reduced so much i.e. only 1 car etc.
Tuesday127
12th Feb 2020
11:02am
This article doesn't seem to take into account share dividends and Franking. On my calculation using my own portfolio ( not as big as $305k ) they should get a return of around $20k pa so the Super drawdown instead of $70k would be around $50k so the super would last longer, not even mentioning that the super would grow at the same rate as the shares ( mine does, I have more in super now than when I started and I draw 7% pa).I'm also not sure about needing $70k to live on, when I retired after earning $130k pa I wondered how the hell I would live on approx. $57K pa but found it easy, our costs had reduced so much i.e. only 1 car etc.
Linda
12th Feb 2020
11:15am
Yes, there is a lot of uncertainty about these days. When our government changes the rules every year on arrangements in retirement things become a lot more uncertain no matter what path is chosen. It is especially upsetting when a big uproar is made of a pensioner increase, only to find it is a plus 20. over a year's time. Meanwhile rates and food and fuel insurances and many other expenses rise by much larger amounts. As people age, the advice is generally to simplify finances, thus taking on new investments that do require careful reviews often seems an unrealistic idea for many. In our later years, most of the general home maintenance must be hired and that gets very expensive. It was interesting how Labor highlighted the franking issues and how the voter backlash happened because of the danger of that avenue being denied. It also notified everyone else that this was one way to possibly make better use of funds in the current scheme. When we have shares we have to monitor them closely. Not everyone will do that so there is risk.
Jayjay
12th Feb 2020
1:09pm
I thought that even if you held money in shares it was deemed by centerlink, and therefore it shouldn’t be an ‘on-again off-again’ process for the Age Pension, depending on what the share market does. I must be wrong?
Jimbo
12th Feb 2020
3:14pm
At last Noel is presenting a step by step answer to this situation. Mercifully no mention of consulting "your financial adviser"this time. This is the type of analysis that retirees want.
Let's hope Noel keeps up this detailed approach.


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