Could this 'cash-strapped' retiree be better placed? Personal finance expert Noel Whittaker assesses her financial health.
The case study presented here describes a possible scenario that would be typical of many of today’s 'cash-strapped' retirees, that is those who rent and receive an Age Pension.
For these retirees, the main issues are the state of their health, inflation and changes to the superannuation and pension rules.
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 any investment strategies are on track and their estate planning is up to date.
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.
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.
Cash-Strapped Single (renter on an Age Pension)
Retirement Affordability Index estimated expenditure: $23,145
Jenny’s estimated expenditure: $27,000
Wages: $3500 pa
Age Pension: $24,258 pa
With more than one third of my full Age Pension of $933 a fortnight going on rent, I have very little discretionary spending – and not much to back me up if something goes wrong. I am worried that I’m going to have to give up my private health insurance – it seems simply unaffordable now. Is there anything I can do to make the sums work? I do part-time babysitting and earn about $3500 per annum from this.
Noel says: This is an example of the challenges faced by single people who arrive at retirement without a house. And, sadly, their numbers appear to be growing. Jenny should make sure she takes advantage of every concession that governments at all levels offer, and also visit websites such as Simple Savings that give thousands of ideas on ways to save money. Even saving one dollar a day is worth close to $400 a year.
It’s great that Jenny has some money from employment – because employment does not just provide that extra income, which is so critical, but also contributes to health and wellbeing. A job provides a reason to get out of bed in the morning.
I also believe that people at every level should develop some kind of a buddy system – a person or persons with similar values and goals, with whom they can meet regularly, preferably weekly, to encourage each other and think about ways to improve their financial situation. It’s a great source of motivation, and will almost guarantee ongoing support when those inevitable situations arrive and Jenny feels down and out of her depth.
My initial thoughts were that Jenny should cash in her super. That way she could save ongoing fees and be free of the death tax that might be incurred by her beneficiaries when she dies. But that begs the question as to what she might do with the money. She would be lucky to get one per cent in a bank account, and the type of superannuation fund she is in should have been paying her between six and eight per cent per annum. The only way for her to get better returns would be to invest in a range of managed funds that are heavily invested in the share market.
But the problem here is that if she is inexperienced in do-it-yourself investing, she would need to get advice. The challenge is that the financial advice industry is so heavily regulated she would need a full financial analysis, which involves a long consultation and would cost at least $3000. That’s money she can’t afford.
On reflection, I think she is better off leaving her superannuation alone. She could relax and enjoy the monthly income, and the fact that her money is being professionally managed. She could still make withdrawals at call whenever she needs money.
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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