Should I spend my money to have full Age Pension?

Should I spend my money to have full Age Pension?

I am very excited about today’s post, as this is based on a question received from one of the viewers of my channel after having watched my last week’s video: “What to do to achieve happy and successful retirement?”

For the first time I’ve decided to present a real case study to show you the power of good planning and understanding the rules that need to be applied to achieve the most effective and successful retirement income and its longevity, together with government benefits.

And this is the question:

My work colleague received some advice that I’d love your opinion on. She and her husband are 64, own their home and plan to retire at the end of the year with about $750K in super and cash. The advice she got was that they should keep money enough for living expenses from now until pension age, and spend the rest holidaying around the world, making sure to leave only $451K in super by 67. The logic was that the return on the remaining $451K, plus full government aged pension (which she thinks they’ll qualify for) is then maximised and their income would be around $70K p.a. which is enough for them. Can that possibly be correct? Sounds scary to me.

Thank you for this question.

I have decided to run few scenarios to compare outcomes depending on the action taken, just to show you that one decision can lead to a successful or not so successful retirement. And that decision will have impact on your whole life, so you better get it right, otherwise you could introduce some severe consequences to your financial outcomes.

Going back to our case study, we have a couple, homeowners, with $750,000 in financial assets, so for the purpose of the exercise I assumed $50,000 in Term deposit, $400,000 in his super and $300,000 in her super account. On retirement at 64 in order to have an income, I am assuming both will move full balances to an income stream such as Account Based Pension.

Based on the advice provided, they are supposed to spend $300,000 within the period of 3 years, enjoying themselves travelling around the word, and on their return to Australia at the age of 67, they would have $451,000 (value in today’s dollars) left between them in their pension accounts and they would start receiving full Age Pension payments.

So for the first 3 years they spend approx.. $100,000pa and once back in Australia and receiving full Age Pension income drops to $70,000pa in today’s value, which would be approx. $79,000pa.

Let’s call it:

SCENARIO 1 – spending money to gain full Age Pension

Before I start showing you my comparison, what is your opinion about this advice? Would you accept it? Do you agree that this is a good retirement plan?

I run the calculator to confirm the following:

• With the level of income being drawn from the account-based pension, They will be eligible for the full Age Pension every year of their life
• At the age of 75 their account-based pension would be worth in total combined approx. $419,000 – you might say it is not a bad outcome
• So what is the value of those account-based pensions at 85? It is: $99,000 – this is only the value of his pension; she has already run out of money a year prior.
• But add another 2 years, and his super is gone as well. No financial security at all.
• What is worse, the only income remaining is Age Pension, which could be a real struggle for the rest of their lives.

Therefore, now we know, that with this strategy in SCENARIO 1, their money would last till they reach the age of 87.

Let’s now look at:

SCENARIO 2 – mixture of retirement income streams

• From the start we keep income at the requested level of $70,000pa plus annual increase based on inflation. So they are not going overseas splashing money just to spend savings to get the full Age Pension.
• We commence a mixture of income streams, partly account based pension, partly annuities.

What is the outcome we can achieve?

• They are not eligible for the full Age Penson payment, but it is as close as possible, as the reduction is only approx. $2,500 between them for the period of 6 years and after that, for the remainder of their lives they are eligible for the full Age Pension payment. So in the most simple terms we can say, that when comparing SCENARIO 1 and SCENARIO 2 we can see that in the first scenario they spent close to $100,000 in the first 3 years, to gain a benefit of $15,000 over a period of 6 years.
  So please tell me now – would you do this?
• Let’s now check the value of their account-based pensions later in life. At age 75 – total value of pension accounts is $364,000. You might say: hey Katheirne, but it is $55,000 less than scenario 1 – and this is correct, but don’t forget they have annuity income running alongside pension accounts.
• However, at the age of 85 they still have asset valued at $151,000, which is $52,000 more than scenario 1.
• And even if they run out of money completely, there are still have annuity payments in addition to the full Age Pension for life. I think, this is a much better, and more financially sound scenario than spending money upfront to get the full Age Pension.

But what else could be done to make sure this couple does not run out of money?

SCENARIO 3 – reduction of spendings

Let’s do a copy of the Scenario 2, but with a reduction of spendings from $70,000pa down to $65,000. Would that make any difference to the outcome?

You might be pleasantly surprised that at the age of 85, a total balance of their combined account-based pensions is $381,000, an incredible increase of asset value by $150,000 when comparing to Scenario 2, and $282,000 when comparing to scenario 1.

SCENARIO 4 – improved and maximised investments

Let’s be a bit adventurous at this point and let’s review the investing pattern. For now, I have assumed a very conservative rate of return of average of 6%pa. Let’s take it a notch higher to 7%, which really should be the aim of most balanced funds.

Now the outcome is an incredible $498,000, which is an extra $134,000 over Scenario 3, extra $284,000 over Scenario 2 and $416,000 more that Scenario 1.

Plus they still have $50,000 in a term deposit, plus their annuities keep running providing income for remainder of their lives.

As a matter of fact, let’s compare the probability factor of achieving the set-up lifetime income for each scenario, taking into account different market conditions and returns: