Case Study: Maximising Income in Retirement – please remember this is an example of advice given – your financial situation may be different so please get advice before you act.
This is a recent client file, we have changed the name and some numbers are rounded for simplicity. This is a real world example of a common advice situation we deal with.
Background:
Betty is single and is 74, she owns her home (a two bedroom unit worth around $600,000) and has $550,000 in super. Apart from that she has typical house and contents and a car worth around $10,000. In my experience and these numbers I would consider Betty a fairly well off retiree who will be quite comfortable in retirement.
Despite this in our meeting she discusses how broke she is and is trying hard to cobble together part time work of around $10,000pa to help buy food and pay the bills, initially I suspect Betty is spending too much and as advisers our main area of assistance will be to work on her budget. On further investigations I discover she has set up an Account based pension in her super which is paying $920 per month ($11,040 per year) as well as this she is getting a part aged pension of $103.50 per fortnight ($2691 per year) for a total income of only $13,731 per year. (with her employment income on top of this)
This is well below the income needed for a comfortable lifestyle of $45,962 a year as reached by ASFA[1] and is well below even the “modest lifestyle” retirement standard of $29,139 a year. Surprisingly ASFA believe that to achieve a comfortable lifestyle you will need a super balance of $545,000, slightly less than Betty has so what is going wrong here?
Betty says she does not want to draw a larger pension from her super or she will run out of money and/or the income she will generate will get even less as she eats into her super lump sum and with the assistance of a friend has worked out this pension amount is satisfactory for her budget and to not diminish her super balance. In my experience this sort of thinking is common, we live our whole life building super, saving and looking at an increasing netwealth as a sign of success. It can be quite hard to change your mindset in retirement to focus on making your assets work for you and actually living off them.
After further meetings and discussions we moved $275,000 of Betty’s super to a lifetime annuity which paid an annual income of $15,038 in year one. This is adjusted up each year by inflation and guaranteed for life. If betty dies early then her estate will get some or all of the $275,00 back but if she lives a long healthy life then the investment will be worth nothing when she dies.
Because only 60% of the Annuity’s value counts for the Pension Asset and Income test Betty’s pension goes up to $384 per fortnight straight away and over the first 5 years Betty will receive $27,241 in extra pension payments as a result of buying the annuity.
(please note the $275,000 is not a magic number for Betty or for you, this is a number reached by working through Betty’s goals, funds she wants left in super for emergency etc)
We also adjusted Betty’s super investments and pension setting so that it can pay the remainder of the $45,962 needed for a comfortable lifestyle (so in year one it will pay $19,517) this does mean her super balance will reduce each year but with even modest investment earnings her super will still last until she is around 110 years old! Remembering too that she does not need to draw the full $19,517 we recommend. Many clients have a very large phycological block to depleting their assets in this way but you have to remember your super is there for you to retire! If Betty lives to her typical life expectancy she will still actually have around 100% of her investible assets available and will have her home as well to pass onto her Children and after our advice she is now comfortable that her money will not run out before she dies. This was a major fear of hers and is with many clients in this stage of life.
As part of our advice we researched the best Annuity product for Betty which was substantially better than any competitor product and helped her select terms that suited her situation. We did not accept any product commissions either initially or on an ongoing basis, from this product.
We also worked with Betty’s existing super fund to generate more income and investment return, because we do not accept commissions or percentage based fees from client’s super funds we can work with any fund, rather than forcing clients into our preferred product. In this case Betty was happy with her fund and it is a high quality Industry fund so there is no reason to replace it. This also minimises disruption for Betty.
Our fees for the advice were $3150 including a number of meetings, written advice and assistance in putting the new financial product and strategies in place. This charge was based on the hours spent on the file throughout the advice process.
If you would like to review your retirement income strategy then please contact us here.
[1] https://www.superannuation.asn.au/resources/retirement-standard