The hard retirement choices an ‘average’ couple will have to make

The Treasury’s review into the current state of our retirement system comes 27 years after the establishment of compulsory superannuation and covers the current state of the system and how it will perform in the future, as Australians live longer and the population ages.

A key point to be made is that the review should not bundle everyone together when it comes to planning for retirement. However, we do know some key facts that pertain to the majority of current retirees.

Firstly, they’re living longer. According to the ABS, over the 20 years to 2018, the proportion of the population aged 85 and over increased by 125 per cent.

Secondly, the number of working-aged (those aged 15 to 64) is reducing relative to those aged 65 and over. In 1974-5 there were 7.3 people of working age to every retiree, but by 2054-55, it’s estimated there will only be 2.7 people of working age to each Australian over 65.

Constructing a retirement income model

With our age pension system under pressure, it’s clear that tomorrow’s retirees will be required to fund some, if not all, of their retirement income needs.

However, we’re continually told that for people with average superannuation balances — currently $270,000 for a man aged 60-65 and $171,200 for a woman of the same age — a comfortable retirement will be out of reach.

The Association of Superannuation Funds of Australia (ASFA) suggests that a single person looking to fund a comfortable retirement will need capital (superannuation) of approximately $545,000, while a couple will need $640,000. Does this mean that a person with an average superannuation balance cannot enjoy a comfortable retirement? No, it doesn’t!

Centrepoint Alliance performed some calculations to see if it was possible for retirees to generate sufficient income to support a comfortable retirement lifestyle, as defined by ASFA.

By way of background, we have assumed a couple (aged between 65 and 75) are retired with their own home and no debts. They have personal effects valued at $10,000, savings of $10,000 and a car valued at $20,000. Their only other assets are their super of $300,000 for the male and $185,000 for the female (ASFA averages rounded up). Their super is held in account-based pensions. When all assets and the age pension are taken into account, the shortfall is $11,113.

What are some good strategies to increase retirement income?

This couple could employ a range of strategies to adjust their lifestyle or boost their income, such as:

• Resign themselves to the fact that they will have to reduce their retirement expectations and live on a smaller income
• Increase their drawings from their account-based pension to cover the shortfall
• Undertake some part-time work. Each person could be gainfully employed (part-time) and earn up to $7,800 each per annum, under the Work Bonus, and not have it be assessed as income for Age Pension means-testing. They could, therefore, boost their income by $15,600 combined, without it affecting their Age Pension
• Borrow against their home using the Pension Loans Scheme. This allows a homeowner to enter into a reverse mortgage type arrangement with the government and receive additional income payments each fortnight
• Enter into a commercial reverse mortgage or equity release arrangement
• Restructure superannuation savings and allocate a portion of their savings to an annuity contract. This may result in an increase in the age pension due to the way this type of contract is assessed under both the assets and income tests
• Downsize their family home and use any surplus proceeds from the sale to contribute to super or invest outside the superannuation environment to generate additional income. However, caution is needed if converting home equity to investable funds, as the value of the home is currently exempt from assets and income testing. Converting part of the home equity to investable money may have adverse age pension implications.

The reality is that retirees faced with the dilemma outlined above may not choose one option over another. If they’re aiming to achieve the level of income required to support a comfortable lifestyle, they may embrace different options at different times during their retirement, and/or use a combination of options.

For example, during the earlier and more active retirement years, undertaking some part-time or casual work and receiving the benefits under the Work Bonus scheme might be attractive, whereas this might not be an option as retirees age.

In the later retirement years, taking part in the Pension Loans Scheme or downsizing the family home to free up equity might be options to consider.

One thing is for certain — developing a financial plan for retirement that might need to last 30 to 40 years is not a ‘set and forget’ strategy.

Any plan developed in the lead up to, or early in retirement will need to be monitored and modified over the years as income needs change and as legislation governing the age pension, superannuation, taxation and aged care evolve.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.