I'm so very excited today as right now we are starting a new section of my videos: "YOUR QUESTIONS ANSWERED".
Since I've started this YouTube channel, I've had many people contacting me in various ways:
some of you left a message or question below my video, others prefer to email me directly
asking for extra explanation or resolving a particular financial problem.
I do reply to everyone and I try to do this within 48 hours but
sometimes questions might require longer explanation, so a video format could be much better
not to mention that more people will benefit from extra explanation.
So send those questions my way, the best place is obviously below the video
as this will help everybody else but more private matters emailed me directly
and at that point we can decide if you prefer more personalized advice one-on-one or a more general online answer is sufficient.
And don't forget to hit that LIKE button and SUBSCRIBE so you don't miss when I answer your question,
or the topic that could improve your financial outcomes.
If you're watching me for the first time my name is Katherine from About Retirement
I'm Certified Financial Planner and I've created this ABOUT RETIREMENT TV"
yes this is official name ABOUT RETIREMENT TV as my way to help you
if you are getting ready to retire in few years or you have maybe already retired
and are looking for some great financial suggestions, how to organise your money, improve your income, your lifestyle,
maybe access to government support such as Age Pension, as well as how to create security for your savings and your assets.
And today we have our very first video: "Your questions answered" No 1 - drums please!
And our first question comes from Tom from Melbourne who writes:
"Hi Katherine, I enjoy watching your videos they are very informative and help me understand
more about superannuation and Age Pension system. I was wondering if there is a way to improve my income
if I have very limited savings and most of my wealth is in my home.
Currently I live in Melbourne and I have home valued approximately $700,000
but I only have $50,000 in savings as I used all of my super to pay off my mortgage,
and the only source of income right now for me is Age Pension which is not a high income.
I was looking at downsizing but even buying a simple property in the country
will cost well over $0.5mil and as I am getting older I really don't want to move away from my kids who are in Melbourne as well.
Any help that you could send my way would be greatly appreciated. Thanks, Tom"
What a great question Tom,
I'm sure there are many more people in similar situations so today
I would like to answer Tom's question: "If you are retired with limited funds
or your funds are mainly locked away in your family home,
is there any way to improve retirement income and have enjoyable lifestyle as well?"
But let me ask you this first - if you were in Tom's shoes
what would you do? what would be your preferred option? how would you make a decision?
Please let me know in the comments below the video, I'm really curious
what would be your preference before you hear my take on this problem.
The way I approach any problem, whether for clients and for myself is
first to confirm what actually is the most important aspect and what is the driving factor of the decision.
So, is it the place where you want to live?
Is it access to Age Pension and you want to have the biggest possible payment from the government?
Or is it your lifestyle? so you don't particularly care at that point where the income comes from,
as long as it provides adequate amount for the type of lifestyle you want to have in retirement.
From Tom's letter it is evident that he wants to stay in Melbourne area
because of his kids, but his quality of life is diminishing because of low level of income.
So let's compare 3 situations:
1. Tom continues to own his home
2. Tom sold his home and he buys another place - downsizing or
3. Tom sold his home and now he is renting in the area of his choice.
Option 1 - Owning your home - there is no change in the situation.
Let's review benefits first:
you have your own place you call home it is your personal space there is this feeling of
emotional security and stability, Tom is close to his kids,
home continues to be an exempt asset for Age Pension benefit.
With other assets, say $50,000 savings $10,000 contents and maybe another $15,000 value of the car,
Tom's accessible assets are well below allowable limit of $268,000.
Therefore Tom is eligible for full Age Pension payment
of $952.70 p.f which is just below $25 000p.a
So what are the negatives?
Income is below the required lifestyle needs. If income is not sufficient then eventually
Tom will have to start digging into his $50,000 savings to assist him with meeting all the ongoing bills.
And of course at some point he may run out of money.
So what are possible solutions: for example reverse mortgage.
Personally I am not big fan and I would say this is the last resource I would ever recommend to anybody mainly
because you are digging back into your equity at one of the highest interest rates payable.
You could look into Pension Loan Schemes. Currently pensioners are allowed to borrow
from the government up to 150% of the maximum rate of Age Pension at 4.5%.
That might help when you get a major bill but, you are required to make repayments so
this is not a long-term solution for your budget.
In the latest Federal Budget and I've created video about this so have a look,
there is a proposal for changes into the Loan Scheme that is supposed to come to effect from 1st July 2022.
So do you believe that this is a viable solution for the rest of Tom's retirement?
Personally I would find this incredibly stressful and inadequate.
So let's look at Option 2 - Downsizing
Let's assume that Tom sold his home for $700,000 and bought a new place for $550,000.
So what are the benefits?
As before home ownership, you continue your home ownership, you have your personal satisfaction and emotional stability.
Home continues to be exempt from Asset Tests and Tom additionally right now has $200,000 in financial assets.
And he is still eligible for full Age Pension benefit of $24,770p.a
The negatives are that home is not in the area of Tom's choice and he is far away from his kids.
So how can we improve this situation?
We cannot change the position of the house, so the distance from children is the price you pay for better lifestyle
but we can improve income with that extra cash.
Not knowing the exact Tom's age I cannot tell if contribution to super is still possible,
but let's just do general maths calculations of getting an income of 3.5% on $150,000 investment,
while keeping $50,000 as cash reserves.
By investing $150,000 and receiving a return of 3.5%, the additional income is $5,250p.a
Therefore now Tom's income has increased to a total of $30,020.
That might not be a fortune but most certainly it is a big improvement in lifestyle.
So do you think this is a better option? Would you decide to do this?
Be away from kids, improve your cash flow, your budget, your lifestyle while still owning your home?
Do you enjoy this video so far? Is that helpful in any way?
If yes I would really appreciate if you click that LIKE button to let me know this is some value to you
and SUBSCRIBE to this channel to know of my next video.
If any questions come through your mind while I am explaining,
write them quickly below the video and I promise I will reply as soon as I can.
Option 3 - Renting
This is our third option to explore.
I have already created a video: "Own or Rent in Retirement" so feel free to jump and have a look at that video
to see the comparison between the two situations.
So what are the benefits of renting?
Tom can now live in the area of his choice and close to his kids.
There are no maintenance or upkeep cost of their rental property, so you have more money for your lifestyle.
There is flexibility of living arrangement, easy to move elsewhere if you need to.
And the big benefit - full balance from the sale of the original home of $700,000
is now available to be invested and create an income stream.
And Tom still continues to be eligible for part-Age Pension.
So are there any negatives?
Well, no more home ownership - full asset assessment under Income and Asset Tests right now of $700,000.
Therefore the asset exemption is not utilized any longer.
Now there is additional rental payment that you have to include into your budget.
Also only part Age Pension is payable at that point.
As a matter of fact the Age Pension has just dropped from $952.70 down to $90.20 p.f under Asset Test
which is a loss of $22,425 every year. This is a huge drop in income,
So let's have a look what can be done right now?
If we invest $700,000 at 3.5% return, we can create an income of $24,500 every single year,
which is greater than the level of Age Pension lost and Tom still has $50,000 in his bank account.
Additionally there is a little gem of payment when you rent which is Rent Assistance.
Payment size will depend on the rent cost per fortnight, you know that Centrelink operates on fortnightly basis.
The maximum of rental assistance is $140.80p.f Calculations of Rent Assistance are not straightforward,
well nothing is, when it comes to any benefits payable by the government especially
Age Pension and any related benefits, but a ballpark figure is that as a single person,
Tom's rent would have to be $320p.f or higher to be eligible for the for the full Rental Assistance.
I'm sure that most rental places in Melbourne cost more than $320p.f
So let's add up income right now.
We have $24,500 from investment income $2,345 as Age Pension payment and $3,660 in Rent Assistance.
So now we're looking at a total income of $30,505 p.a
which is not much different from Option 2 of $30,020p.a
So which option would you choose right now? Living far away from kids but owning your home?
or being close to your family and rent? Let me know in the comments below please.
I'm extremely curious right now.
But can we do even better?
Let's review our Option 3 again to see if anything can be done to improve that income.
Until now when I was talking about investing and return of 3.5% I assumed private pension-like accounts,
or similar investments that are all subject to deeming under Income Test.
If instead, we use combination of investments, partly to a pension or managed funds or shares or combination of those,
and partly to a specific type of annuity.
If we invest $400,000 at 3.5% that will create an income of $14,000.
The balance of $300,000 we invest into specific type of annuity that is Age Pension friendly under Asset Test,
Assuming age of approximately 67 that will create an income of $12,826.
But look what happens now: Age Pension has just increased up to $452.00 p.f
which is additional income of $11,744 plus we still have full rental assistance of $3,660
and now our total annual income arrives to $42,230.
So now we arrived at the situation of improving Tom's income by $12,000 every year plus
Age Pension, annuity income, rental assistance are virtually guaranteed for life.
The $400,000 return of 3.5% is also pretty conservative but I really didn't want to go overboard with my assumptions.
And this is exactly what I do with my retired clients. Organising income to ensure it will run for life.
So which option would you choose right now? What would be your preference?
As you can see there are many options available to you, and sometimes it is not easy to come up with the right answer,
and the view of another person could be very helpful.
However those calculations will be completely different for a couple as opposed to a single person like Tom.
The outcome will also vary every time there is a different asset balance to deal with.
So Tom's case is very much an example and as I said general advice and calculations,
that can be completely different to your situation.
So the idea of my video today is to answer Tom's questions but it is an example only,
and it may not necessarily be a solution for your particular issue.
If you would like for me to check your situation, just email me directly Katherine@aboutretirement.com.au
If you have a general question just write below my video.
Also feel free to check out my website. There's plenty of information on my website plus
every single video in there as well.
If you enjoyed this video please LIKE it, SUBSCRIBE to this channel, as I do bring your financial updates on weekly basis.
but before you go, have a look at other videos:
with the first lot about retirement income and Age Pension -
explanation of various rules Income and Asset Tests.
And the second part of videos: how to prepare your assets
including superannuation for your best retirement.
Enjoy and I will be talking to you next time. Bye