Sometimes, retiring with less, can mean more. Money Matters Monday 27th November 2017
Sometimes, retiring with less can mean more.
Believe it not, Christmas is a popular time to retire. After all, it makes practical sense to finish at the end of a year, even though July might be better for tax reasons.
When is the right time to end a career anyway? Many would say, when they have saved enough money to live comfortably thereafter. And that’s a good philosophy.
But how do you know if you have saved enough to retire? The best way to be sure, is to get professional advice. There’s a new asset test which could affect you, and may well mean the best thing to do is finish up sooner, rather than later.
The new asset test
Treasurer Morrison has set up an incentive for people to retire with less savings. Under the terms of this new age pension assets test, people must earn 7.8 percent income per annum on their savings above a threshold level just to replace the age pensions they lose due to having the extra savings.
As this is extremely difficult – many people with more retirement savings have less total income to live on. If people of pension age work longer and save more, they will have to live on less income in retirement, unless they spend their capital.
Here’s how it works
For example, homeowner couples with investments greater than $380,000 and up to $827,000 will have less total income than those with $380,000 of assets. Single retirees with more than $254,000 of savings, up to $550,000, will have less income than those with just $254,000.
Once the threshold is exceeded, the age pension falls much more quickly than investment income can rise to replace it. It may even make sense for some people who are under pension age but have more savings than their threshold level, to quit work early and spend capital before pension age.
By doing this, they will then get more pension and more total income after they reach pension age. The age pension is a very important income source when interest rates on bank deposits are so low. There are higher non-bank deposit rates advertised, but these need to be approached with a degree of caution because some of them offer a high-risk.
Sources of retirement income
Annuities also provide guaranteed incomes. They pay a little more interest than bank deposits. In some cases, they can also help reduce assets test assessments, ensuring more age pension is paid.
The most popular retirement income investments are account-based pensions set up with superannuation balances. These can be invested in things a retiree feels comfortable with and a regular income is paid at a higher rate than bank deposits.
Rental properties, shares, and other non-super investments can also provide retirement income.
Careful planning is needed to ensure an income great enough to live on. However, if people enjoy their work, it can also be for their physical and mental health to stay on, even if it means less income later.
As always, if you have questions about your finances, please contact us.
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