A tale of two retirements – which would you choose?

Sam and Sally Smith have worked hard all their lives, paid their taxes and, now they have retired, they feel they are entitled to a full age pension.

Jan and Jim Jones have also worked hard and paid their taxes. However, concerned that Australia’s aging population and ballooning pension bill will make it increasingly difficult to qualify for an age pension, they have sought to be as financially independent in retirement as possible. With diligent savings and smart use of superannuation, they have built a significant nest egg.

While both couples have equally valid views, in one respect Jan and Jim have already been proven correct. As of 1 January 2017, changes to the assets test meant that many age pensioners would either see a reduction in their pension or would lose it altogether.

What matters most?

This left would-be pensioners asking themselves: what matters most? Clawing back the tax paid over their working lives, or living the most comfortable lifestyle they can? Several strategies can help boost the level of age pension, but these usually involve reducing the level of financial assets assessed by Centrelink which can deny pensioners both the income those assets could otherwise generate and capital withdrawals.

The Smiths might, for example, spend up big on home improvements, give money away to their family within allowable limits, and take an expensive overseas holiday. Once back home they might then qualify for a full age pension of $34,252 per annum¹. That’s close to the amount ($34,226pa²) that the Association of Superannuation Funds of Australia (ASFA) calculates is sufficient for a “modest retirement” for a 65-year-old couple. That is, “only able to afford fairly basic activities.”

Things aren’t quite as bleak as that. The income test allows Sam and Sally to earn a combined $7,488 per year³ and still receive a full pension, but that total of $41,740 pa leaves them quite a way short of being able to afford a “comfortable” lifestyle. ASFA defines this as one that “enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.” For a 65-year-old couple, this is estimated to cost $59,236 pa.

The self-funded alternative

That’s more the kind of lifestyle the Joneses have in mind, even if it means not qualifying for any age pension. Freed from the need to watch every dollar and to report any changes in their circumstances to Centrelink, an inheritance, for example, they are also insulated from the impacts of any future changes to the age pension.

Start early and plan well

Unfortunately, many people retiring today don’t have a choice and, dependent on the age pension, they will be denied that comfortable retirement. The key is to start retirement planning as early as possible. Pensions and superannuation are complex areas, so it is essential to obtain detailed and personalised advice from a financial advisor.

¹ As at June 2016
² As at December 2015
³ As calculated under deeming rules. The actual cash amount may differ

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General Advice Disclaimer

This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

Paradigm Strategic Planning Pty Ltd is an Authorised Representative of Sentry Advice Pty Ltd AFSL 227748

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