Possibly the most common question people approaching retirement have is “Can I afford to retire?” And “Will I have enough income to live on in retirement?”
Obviously the answer depends on how much income they will need. If they only need a modest income and have a lot of savings they will be fine. If they expect a high income and have limited savings they are likely to run out too soon.
There are other factors to consider too. Is the retiree happy to spend their capital in retirement or do they wish to leave money for their children? Will they be investing cautiously and earning low returns, or with a large exposure to more variable, growth assets for high returns?
Knowing the person’s circumstances and desires, financial planners can answer the key question of whether they can afford to retire.
The two most common sources of retirement income are savings invested to provide cashflow, and Centrelink. Investment income can be from bank interest, super pension payments, share dividends or property rents. Centrelink provides the Age Pension.
To qualify for an Age Pension a retiree must pass two tests – the Assets Test and the Income Test. Centrelink applies whichever gives the retiree the least entitlement. The Income Test is much more lenient than the Assets Test.
Most retirees who don’t have defined benefit pensions are limited by the Assets Test. Their home is exempt from the Test but little else – only invalid aids (the luxury gopher), and medals for valour. A single homeowner with up to $301,750 of assets and couples with up to $451,500 receive full pensions.
Non-homeowners are allowed $242,000 more. The full pensions are $1,064 per fortnight for singles and $802 fortnightly each for couples. Part pensions are paid to single retirees with up to $656,500 of assessable assets and couples with up to $986,500. Assets above those cut-off points mean no pension.
Two investments have Centrelink concessions. Funeral bonds can be purchased to pay future funeral expenses. Up to $15,000 per person is exempted by Centrelink. This can boost their Age Pension by $45 per fortnight or $1,170 per annum.
Market linked annuities guarantee an income for life and a return of capital if the retiree dies early. Forty per cent of the amount invested is exempted by Centrelink. This can mean a large Age Pension increase depending on individual circumstances.
Financial planners can calculate a retiree’s Age Pension entitlement and determine how much income their investments can produce. This allows them to estimate a reliable income level for the retiree. Let’s hope it will be enough.