Thank you to Gina from Sydney for today’s listener question. She says she loves the way the podcast explains difficult concepts in an easy to understand manner and is impressed by the variety of topics. Thank you for the feedback, Gina – we really appreciate it!
The question today is about having no money once you have already retired. If you are no longer earning money, and have realised you don’t have enough, what do you do?
First of all, this scenario is not black and white. Just because you are officially retired doesn't mean you can never work again. However, if you have stopped working and realise you need more money, working casually or part time could be an option. We don't recommend going and finding the first full time job you can and doing that for the next five years. Chances are you won’t like it. But it could be a good opportunity to start something new and different. You might be able to make up the income shortfall while also finding something you like. The way we see it, your situation doesn’t have to be a matter of either being retired and happy, or working and miserable.
The second aspect to this is what you actually consider ‘enough’. There are people who say you need 20 times your salary to retire. But how much you actually need is extremely varied depending on circumstances such as age, income, Centrelink payments, your expenses and property ownership. It’s a very fluid concept. Perhaps you do have enough, and all you need to do is make a few small adjustments to your yearly budget. This doesn’t mean you need to stop doing the things you love. You could still prioritise travel, if that’s your thing. But we would suggest having a really thorough look at the detailed budget to see if there are any changes you could make; any small monthly costs to eliminate. These can always add up and make a significant difference over a year.
When looking at your budget, we’re not saying try and cut your expenses from $60,000 down to $30,000 – we know that’s not reasonable. Our suggestion is just to consider the different scenarios.
We also need to consider strategies around the age pension. The age pension is based on two tests – an assets test and an income test. There are certain limits you can have in both of these. If you structure things correctly you could still work part time without affecting the age pension. Plus, there are certain things we can do to optimise your pension – for example if you are getting a partial pension because of your assets test, you could still work and earn an amount just under the income test so that it doesn’t affect your pension.
A lot of people don't get the full pension because of this asset test, so one thing they can do is to pick up some part-time or casual work and raise their income.
It’s also a case of how your money is used when it’s an asset. For instance, if you take $30,000 from your savings (considered an asset), and move that into doing some repairs on your house in one go (repairs you were planning to do anyway), then this reduction of assets in the bank could raise your pension. In other words, you would have less money as an ‘asset’. This all just comes down to mathematical calculation.
Many people choose to downsize their home at some point in their lives, but when that extra money becomes available, it is then assessed by Centrelink as an asset.
Many clients are in big cities and often, a lot of their net worth is tied up in their home. Some (for example, in Sydney) live in a $2 million home but they don’t have a lot in cash (that is, they aren’t very liquid). So despite the fact their home is worth a big chunk of money, it is not something they can draw money from.
There are different ways to tap into equity from your home (such as downsizing, or selling and renting instead). The assets test for a couple who own a home is $405,000 to get the full age pension. So if they were applying the assets test, they could effectively have $400,000 in financial assets – be it super, investments or cash. The value of the house is not included in this. So if they are receiving the full age pension and their $400,000 starts to run out, they could sell their $2 million house and buy another one for $1.6 million, then put that extra $400,000 in the bank and do it all over again – but still stay below the assets test. Then they could repeat the process again when they buy the next house at $1.2 million. This is just a simple example, but it shows there are many strategies to optimise the age pension.
We have lots of ideas on this topic. Of course, they are not relevant for everyone – and it’s why we always recommend seeing a financial adviser to help you look at different options.
