The Pleasures & The Pitfalls
Sydney Morning Herald
Monday September 24, 1990
THE years in retirement are potentially the best of our lives. At the very least, they should provide a period of great freedom when, thanks to not having to work, we have the ability to set our own agenda.
For some, the main focus will be on travel, while for others the real buzz will come from spending time on the pleasures of an alluring, but long postponed, hobby or leisurely sport.
Then there are those who throw themselves enthusiastically into community activities or supporting their local church. Yet others will use the time provided by retirement to indulge a passion for the theatre, opera or ballet.
The list of possible retirement pleasures is almost endless, with retirees ranging from people who simply enjoy pottering around in the garden to those enthusiastic dynamos who have a finger in virtually every pie.
Yet while the options are enormous, the list of people who are actually able to make full use of their retirement freedom is shorter than it should be.
The reason is simple enough and can be summed up in just one word - money.
Without it even the simplest retirement pleasures can become an impossible dream. Certainly anyone struggling on the age pension, with no other income, has little left over for any indulgences once the essential bills are paid.
For those who have already reached retirement and find themselves in this position, the outlook is not particularly encouraging.
However, there are plenty of others who either are about to retire, or who have done so recently, who can take action now to ensure that the savings they have put aside serve them well for years to come.
This is true whether you need to make use of a part-pension or have sufficient investments to provide fully for your own financial needs.
In both cases it is essential to properly assess the true costs of retirement and, when this has been done, to invest your savings in the best way possible to serve your own particular financial needs.
Probably the biggest single financial mistake is the failure to take account of the severe toll taken by inflation. What looks like a good income now rapidly fades in real terms as rising costs cut into your dollar's purchasing power.
The first step towards avoiding this pitfall is to carefully assess your current costs and income, and then try to project these forward to see how you would be faring in, say, 10 years' time. By doing this you will get an idea of whether or not you are currently living beyond your means.
To help you carry out this task, this special report includes a retiree's Financial Calculator (see Page 3). While it can provide only an approximate guide to your likely future financial position, everyone approaching or in retirement should take the trouble to fill it out.
When doing so it is important to keep in mind the phenomenon which, in the past, I have dubbed the Two Ages of Retirement.
In the first of the ages, most retirees are fit and active, and are keen to go on lengthy trips, both at home and abroad, and be heavily involved in social and sporting activities (even if many put aside their golf clubs and turn instead to the pleasures of the bowling green). As a result this period(let's say the first 10 years of retirement) is the most expensive.
This can be contrasted with the second age, when many decide that extensive travel is too exhausting and the desire for late nights at the theatre or restaurants tends to wane. When this happens, time spent at home and with friends and family becomes an even more important part of life, especially for those who opt for a retirement village.
The key implication from this particular split is the fact that the early years of retirement are likely to be more expensive then the latter. As a result, when drawing up your retirement budget it is quite reasonable to plan for your income being less (in inflation-adjusted terms) later in retirement than it is at the start.
Another point which needs to be stressed is the fact that "financial needs"in retirement vary from individual to individual. However, while it is sensible not to make your early retirement years unnecessarily austere, my impression is that the main mistake most people make is to start out spending too freely and, as a result, find they are hit by a financial squeeze five or 10 years later. The Financial Calculator on Page 3 should help you avoid this fate.
For some the most important challenge is to arrange their financial affairs to ensure they not only get a part-pension, but are also eligible for the valuable pensioner health benefits card.
While it would be unethical for the rich to cunningly juggle their wealth so as to get the pension, many people with quite modest savings miss out because they don't understand the increasingly complex rules which determine pension eligibility.
The most important of these rules relate to the income test and assets test. Under the former, a single person's pension is reduced by 50 cents for every dollar of non-pension income in excess of $40 a week. For couples the threshold is $70 a week.
As explained above, it is vital to understand exactly what is meant by"income" since the Federal Government's deemed income rules now catch a lot of investments which, in fact, generate little or no income.
In the case of the assets test, this results in the pension being cut by $2 a week for every $1,000 of assets in excess of specified thresholds (see tables). Assets include virtually all possessions, not just investments.
For people who have built up substantial savings, usually through a combination of superannuation and other investments, such issues are irrelevant since these retirees are able to generate independently sufficient income to finance a comfortable life.
However, they face an even bigger financial task if they are to succeed in maintaining their lifestyle throughout retirement. In particular, if their investments are not handled properly it is likely that they, too, will eventually be forced back on the pension.
The crucial issue is to work out the right balance between investing for income and investing to get capital growth, with the latter targeted at providing protection against inflation. As this erodes the purchasing power of the retiree's income stream, growth investments can be gradually sold and reinvested to get income.
One alternative to this approach is to opt for investments which combine both growth and income, with one of the main examples being residential real estate. As well, it is possible to achieve a similar goal through a mix of investments in the sharemarket and property trusts. However, the current troubles in the managed fund industry will make some people wary of this approach.
THE ASSETS TEST HOMEOWNERS MARITAL STATUS FULL PENSION* PART PENSION Single Up to $103,500 Less than $174,250 Single + 1 child (under 13) Up to $103,500 Less than $192,750 Married (combined) Up to $147,500 Less than $265,500 NON-HOMEOWNERS MARITAL STATUS FULL PENSION* PART PENSION Single Up to $177,500 Less than $248,250 Single + 1 child (under 13) Up to $177,500 Less than $266,750 Married (combined) Up to $221,500 Less than $339,500 * Assets over these amounts reduce the pension by $2 a week for every$1,000 above the limit (single and married).
© 1990 Sydney Morning Herald