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.
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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
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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.
