The Federal Government’s proposed budget changes to Centrelink Age Pensions has led many financial experts to argue that individuals would be far better off renovating their homes, buying fancy cars, or blowing cash on an overseas holiday than saving hard for their retirement and now face a worsening lifestyle later on in retirement.

Analysis by the Association of Superannuation Funds of Australia shows that if the changes announced in last week’s budget are implemented, a couple who own their own home would have a higher annual income with just $200,000 of savings than a couple retiring on $1.1 million assuming a rate of return of 3%. And the difference is not nominal. Assuming all the investments are held in conservative assets, such as cash, a couple with $1.1 million ofassets would receive an annual income of $33,000, while a couple with $200,000 of savings in the bank and access to the full government Age Pension would earn $40,900 a year.

This is because, under the proposed changes, the threshold for the Part Pension for couples who own their home will fall to $820,000 from $1.1 million. At the other end of the scale, the value of assets retirees can have in addition to the family home to quality for a full pension is set to increase from $286,500 to $375,000.

Assuming the $1.1 million of assets invested would provide a 5% rate of return. This would provide income of around $55,000 per annum. In this low interest environment is near impossible to get an average income return of 5.5% by investing into secure type assets. Many retirees would have to take on more risk to achieve a 5% income return.

Another interesting change in the budget is that the amount to determine a Part Pension has increased from $1.50 for every $1,000 of savings to $3.00.

Also interesting is whereby a home-owning couple with $1 million of assets and, subsequently, no access to any pension stand to earn $50,000 a year, while a couple with $400,000 of savings and a Part Pension of $33,000 will receive $53,000 annually.

Based on both of the above examples there is no incentive for a home-owning couple to save more than $200,000 for their retirement, unless they are confident they can amass closer to $1 million.

Interestingly, ASFA estimates a couple will need around $58,000 a year of income to have a comfortable retirement.

So what do impending retirees do? Retirees with $820,000 and above of savings may consider reducing their asset base in order to be eligible for a Part Pension, but above the $900,000 threshold, it probably makes sense to be fully self-funded and retain the flexibility of having more capital.

It also may indicate that couples in their mid 50’s and 60’s with $500,000 of savings may choose to retire early, because they stand to earn more money than they would if they had retired with $100,000 more.

One thing for sure, it is pointless spending unnecessary money just to get a higher pension. Importantly if you are at least 5 to 10 years away from retirement you should be seeking good professional financial advice in determining your strategy leading into your retirement.



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David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus

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