In their Retirement Income Report based on their October 2017 survey of 7,305 Australians over the age of 40, Investment Trends, an Australian research firm, revealed that only 46% of Australians feel prepared for their retirement. Of these, only 25% believe that they will live comfortably, rather than modestly, in retirement. Will that really be comforatable enough for you or will you better off with FMD's No Compromises standard?
|ASFA Retirement Standard||Annual living costs||Weekly living costs|
|Couple - modest||$39,353||$754|
|Couple - Comfortable||$60,264||$1,154|
|Single - Modest||$27,368||$524|
|Single - Comfortable||$42,764||$819|
Source: ASFA Retirement Standard
|FMD 'No Compromises' Retirement||Annual living costs||Weekly living costs|
In addition, the report states that 51% of retirees expect to outlive their retirement savings. If you expect to live on more than the Age Pension (full Age Pension rates plus supplements are $35,916 for a couple, or $23,824 for a single person, applicable since 20 September 2018), you will need to use smart strategies to find the additional income.
Home equity withdrawal
Unlocking the equity in your home can be an effective way to achieve your lifestyle goals and generate more income in retirement. However, it will also reduce the size of your estate and the amount of wealth you can pass to the next generation. We explore the pros and cons of the three main financial strategies.
Option 1: Downsize your home and invest or live off the proceeds
What is it?
Selling your home to move to a smaller, lower-cost home to free up cash to invest and create an income stream.
Frees up cash and allows the money to be reinvested tax-free into superannuation. From 1st July 2018 those aged 65+ can invest up to $300,000 ($600,000 per couple) from the proceeds of the sale of a primary residence (held for 10 years or more) into their super fund and then draw an income stream. Money can be invested on top of the $1.6 million contributions cap and is not impacted by the work test.
The proceeds of the sale are assessable for the Age Pension Assets Test, so it is likely to reduce your Centrelink Age Pension. For those in aged care, it will also increase assessable assets and is therefore likely to increase aged care fees.
Option 2: Use a reverse mortgage to unlock home equity
What is it?
A reverse mortgage is a type of home loan that allows you to borrow money using the equity in your home as security.
Delivers additional income throughout retirement and providing you draw-down on your reverse mortgage as an income stream it won’t be assessable for Age Pension or aged care purposes.
Interest rates are typically higher than for other type of loans and debt can grow quickly due to compounding.
Option 3: Use the Pension Loan Scheme (PLS) to generate more income
What is it?
The Pension Loan Scheme (PLS) is essentially a reverse mortgage provided by the government. The government takes a stake in your home and receives the money back (with interest) from your Estate.
A relatively straightforward way to generate additional retirement income without leaving the family home. The interest rate charged (currently 5.25% p.a.) is typically cheaper than a reverse mortgage from a bank. From 1st July 2019 self-funded retirees on a full Age Pension will be able to access the PLS for the first time and top-up their income by a greater amount. A couple receiving the full Aged Pension of $25,000 could receive up to 1.5 times the full the pension via the PLS, increasing their annual income to $37,000.
Unlike a reverse mortgage from a bank, PLS income will be included in aged care means testing, so using the scheme can significantly increase aged care costs.
Picking the right option for you
The Retirement Income Report also revealed that when seeking help with their retirement goals, 33% Australians are most inclined to turn to a financial planner, and 25% to their super fund, for assistance. Whether you choose to get professional financial advice or go it alone, the key to a comfortable retirement lifestyle is to act now.
If you'd like to speak to an expert, book a 1-hour consultation with one of our advisers. The first meeting is on us so that we can have a chat and see if we’re the right fit for each other.