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How to Improve Income and Lifestyle in Retirement

How to Improve Income and Lifestyle in Retirement

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Today I would like to reply to one of the recent letters that comes from Tom from Melbourne, who writes:

“Hi Katherine, I enjoy watching your videos, they are very informative and help me understand more about the superannuation and Age Pension system. I was wondering if there is a way to improve my income if I have very limited savings and most of my wealth is in my home.

Currently I live in Melbourne and I have a home valued approx. $700,000, but I only have $50,000 in savings, as I used all of my super to pay off my mortgage and the only source of my income now is full Age Pension, which is not a high income.  I was looking at downsizing, but even buying a simple property in a country will cost well over 0.5mil, and as I am getting older, I really don’t want to move away from my kids who are in Melbourne as well. Any help that you could send my way would be great. Thanks Tom.”

What a great question Tom. I am sure there are many people in similar situation, so today I would like to answer Tom’s question:

“If you are retired with limited funds, or funds that are mostly locked away in your family home, is there any way to improve retirement income and have an enjoyable lifestyle as well?”

If you were in Tom’s shoes, what would be your preferred option? How would you make this decision?

The way I approach any problem, whether for clients or my own, is first to confirm what actually is the most important aspect, what is the driving factor of that decision:

  1. Is it the place where you want to live?
  2. Is it access to Age Pension and have the biggest possible payment from the government?
  3. Is it your lifestyle? So you don’t really care where the income comes from, as long as it provides an adequate amount for the type of lifestyle you want to have in retirement?

From Tom’s letter, it is evident, that he wants to stay in Melbourne area, because of his kids, but his quality of life is diminished because of his low level of income.

So let’s compare 3 situations:

  1. Tom continues to own his home,
  2. Tom sold his home and buys another place – downsizing,
  3. Tom is renting in the area of his choice.

Option 1 – Owning your home – no change:

Benefits:

  • You have your own place you call home, it is your personal space, feeling of emotional security and stability.
  • Tome is close to kids,
  • Home is an exempt asset for Age Pension benefit
  • With other assets say: $50K savings, 10K contents (Centrelink will accept this valuation, so don’t overdo it), and let’s assume $15,000 value of a vehicle. Tom’s assets are well below the allowable Assets limit of $268,000, therefore the full Age Pension payment is payable to Tom of $952. 70p.f Total Income – $24,770p.a

Negatives:

  • Income below the required lifestyle needs only single Age Pension,
  • If income is not sufficient, then eventually Tom, you will have to dig into your $50K savings to assist with meeting your bills – problems of course is, what happens if you run out of this backup savings?

Possible solution could be:

  • Reverse mortgage – personally not a big fun, this is a very last resource I would be ever recommending, due to digging dip into your equity and high interest payable on this type of a mortgage.
  • Pension Loan Scheme – currently pensioners are allowed to borrow from the government up to 150% of the maximum rate of the Age Pension at 4.5%. That might help when you get a major bill, but you are required to make repayments, so this is not a long-term solution for your budget.
  • The latest Federal Budget – here is my video going over the budget proposals – is proposing some changes to the Pension loan scheme. It is supposed to come into effect from 1st July 2022.

So, do you believe this is a viable solution for the rest of Tom’s retirement – personally, I would find it incredibly stressful and inadequate.

Option 2 – Downsizing

Let’s assume Tom sold his home for $700,000 and bought a new place for $550,000

Benefits:

  • As before- homeownership – personal satisfaction and emotional stability
  • But now Tom is far from his kids,
  • Home continues to be exempt from asset test,
  • Tom now has $200,000 in financial assets,
  • Still eligible for the Full Age Pension benefit of $24,770pa

Negatives:

  • Home is not in the area of choice and far from kids.

How can we improve situation:

  • We cannot change the position of the house, so the distance from children is the price to pay for a better lifestyle, but we can improve income with extra cash
  • Not knowing the exact Tom’s age, I cannot tell if contribution to super is still possible, but let’s just do general math calculations of getting and income of 3.5% from $150,000, while keeping $50,000 as cash reserves.
  • By investing $150,000 and receiving a return of 3.5%, the additional income is $5,250pa
  • Therefore now Tom’s income has increased to a total of $30,020 – that might not be a fortune, but most certainly improvement in lifestyle.

So, do you think this is a better option? Would you decide to do this, be away from kids, but improve your cashflow, your budget and your lifestyle, while still owning your home?

Option 3 – Renting

This is our 3rd option to explore. I have already created a video: “Own or Rent in Retirement”, so you can jump onto that video later to see the comparison the two situations.

Benefits:

  • Tom can now live in the area of his choice and close to kids,
  • No maintenance and upkeep costs of home – more money for lifestyle,
  • Flexibility of living arrangement, easy to move elsewhere if needed,
  • Full balance from the sale of original home of $700,000 now available to organise income stream,
  • Still eligible for part Age Pension

Negatives:

  • No more home ownership
  • Full asset assessed under Income and Asset Test – therefore “asset exemption” is not utilised,
  • Now there is an additional rental payment you need to include in your budget.
  • Only part Age Pension payable – as a matter of fact, the Age Pension has just dropped from $952.70 down to $90.20pf under Asset Test, which is a loss of $22,425.

That is a huge drop in income, so let’s have a look what can be done now.

  • Assuming the same 3.5% return that’s an income of $24,500 from your $700K, so it is greater than the level of Age Pension lost, and Tom still has $50K in his bank account.
  • Additionally, there is a little gem of payment, when you rent, which is Rent Assistance. Payment size will depend on the rent cost per fortnight (Centrelink operates on fortnightly calculations), with the maximum fortnightly payment of Rent Assistance of $140.80. Calculation of Rent Assistance are not straight forward, nothing is when talking about any government benefit, especially Age Pension and related benefits, but a ballpark figure is, that as a single person, Tom’s rent would have to be $320pf or higher to be eligible for the full Rent Assistance. I am sure that most rental places in Melbourne cost more than $320pf.
  • So let’s add up that income now:
  • $24,500 – investment income
  • $2,345 – Age Pension
  • $3,660 – Rent Assistance

      $30,505 – total income now

Which is not much different from the option 2 of $30,020

So which option would you choose?

Living far from kids but owning your home or being close to your family and rent?

But can we do it better?

Let’s review our Option 3 again to see if anything can be done to improve our income:

Until now, when talking about investing and return of 3.5%, I assumed private pension like accounts, or similar investment, and all of them are deemed under Income test.

If instead, we use combination of investments: partly to a pension of managed funds or shares or combination and partly to an annuity:

  • $400,000 @3.5% = $14,000
  • $300,000 to an annuity that is Age Pension friendly under Asset Tet = $12,826
  • Age Pension has just increased up to $452.00pf = 11,744
  • Rent Assist = $3,660

Total income now arrives to $42,230

So now, we arrived to the situation of improving Tom’s income by $12,000 every year, plus Age Pension, Annuity income, Rent assist are virtually guaranteed.

The $400,000 return of 3.5% is also pretty conservative, but I didn’t want to go over the board with my assumptions. And this is exactly what I do with my retired clients, organising income to ensure it will run for life

So which option do you like now?

What would you choose now?

As you can see, there any many options available to you and sometimes it is not easy to come up with the answer and the view of another person could be very helpful.

However, those calculations will look completely different for a couple as opposed to a single person like Tom.

The outcome will also vary every time there is a different asset balance to deal with, so Tom’s case is just an example and as I said general advice and calculations, that can be completely different to your situation.

So the idea of my video today is to answer Tom’s question, but it is an example only and it may not be the solution for your particular issue.

If you would like for me to check your situation, just email me directly to hello@aboutretirement.com.au

I really hope you found the answer to Tom’s question, this lengthy article and comparison of 3 different cases beneficial and maybe a bit of an eye opener. Just goes to show, that even a seemingly simple situation requires a good level of preparation and review.

Take care I will talk to you next time.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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