Five retirement funding options for you

Making retirement plans can feel like the ultimate challenge at times.

It seems that every week we see even more research confirming that the greatest concern of Australian retirees is that they will run out of money. While a lot of this data is well-meaning, it can also be self-defeating as many people may simply give up on retirement planning for all time.

That’s not going to result in the best outcome for any retiree. There are a lot of reasons why it’s important to start planning early. And one strong reason is that the less you have, the more you can affect your ultimate outcome if you understand the rules and options at your disposal. With nearly 700 Australians retiring every day, a widespread lack of confidence in retirement planning means many retirees will end up with less than they might have had, because they didn’t fully understand or explore their options. It’s time to consider a simpler approach.

1. The first is to review what you have.
2. The second is to scope your needs and whether what you have will cover them.
3. And the third is to establish if there is a gap between what you believe you will need, and how far your current savings will stretch.

Let’s start by tackling some of the retirement planning myths that abound. Here are the three big ones:

• Assuming you live long enough, it’s highly likely that you’ll run out of funds.
• More retirees are entering retirement with higher debt and this is certain to adversely affect their wellbeing in retirement.
• Retirement is a major life stage so you need to get your finances in order, up front, to make sure you don’t outlive your funds.

These alarmist scenarios are unlikely to occur. That’s because retirement funding is far more extensive than just an Age Pension topped up by super. You can adjust your retirement funding plans along the way, across your entire retirement journey, not just at the time you leave work. Your needs and wants will change and so can your funding.

There are five main sources of funding in retirement. The Retirement Income Review, undertaken by Treasury in 2020 reinforced the notion of three retirement pillars (the Age Pension, superannuation and private savings). But in practical terms, most retirees can also access extra funding after leaving full time work by using equity in their home or by working to the extent their Age Pension entitlement allows.

The following is a brief summary of each of the five main ways Australians fund their retirements, how they do this and some useful links to support you to learn more about each one.

The most important starting point is to recognise that the life stage of ‘retirement’ is not one stage, but many, each with different needs, expectations and rules. Retirement is as different as every individual retiree. So there is far more latitude that most people realise during their retirement journey; so many different ways to fund a productive and fulfilling life stage.

The following five different ways you can fund your retirement can often overlap and confuse. Here’s a brief explainer of each one and how it might contribute to your retirement income.

1. Superannuation
   The proportion of retirement income flowing from super savings is increasing as retirees leave work having benefitted from 30-plus years of saving super. There is a gender difference here, as women have tended to earn less, have fragmented work careers and are more likely to be carers. Currently the median super savings for a male and female at retirement are $220,000 and $204,000 respectively. Super is typically accessed as an Account-Based Pension (ABP) or lump sum. Decisions about how to access super at Age Preservation age can often affect longer term Age Pension entitlements.
2. Age Pension
   The Age Pension is the ‘work horse’ of the Australian retirement income system, providing a safety net for all Australian residents. It is based upon a means test which views your income and assets. Importantly, the family home is exempt. The current payment rates for a full Age Pension are $1097 for singles and $1653 for couples (combined). Most Australians will enter retirement on a part-Age Pension supplemented by super savings. But this can change over time.
3. Private Savings
   This might be cash in bank accounts or term deposits, property which earns rental, shares or other investments. Because these sources of private savings are so diverse, there are very different rules guiding each type of savings and so it is generally not useful to discuss as a single category. Where and how you hold these savings, however, is of interest to Centrelink for assessment purposes.
4. Work Income
   A quiet revolution is going on in the mature work space. Many Australians would have once ‘retired’ completely and never worked again, except perhaps as a volunteer. Now there are many ways to keep working while you start to access retirement savings. This often occurs at preservation age when you can consider a Transition to Retirement Strategy (TTR) and access an Account-Based Pension and supplement this income stream with some work income. Or you might decide to work through until Age Pension age at 67. The Federal Government has recognised the value of older workers, particularly due to a skills shortage post Covid, by increasing the Work Bonus for the Age Pension to $11,800. Other countries do this differently. New Zealand for instance allows retirees to work as much as they wish without any pension penalty.
5. Home Equity
   Using the wealth in your home to top up retirement income can make a lot of sense. As noted, the median superannuation savings level of $204,000 - 220,000 may not be enough in extra savings to cover your needs and wants across the 20-30 years of retirement. The median house price in Australia is more than $900,000, so this remains a significant source of wealth for the 75+% of retirees who own their own homes. They can choose to access this wealth by using the Federal Government’s Home Equity Access Scheme (HEAS) or by a Household Loan.

There’s a rapid upsurge in retirees accessing the HEAS. The scheme allows all retirees of Age Pension age (and not just those on an Age Pension) to access the wealth in their homes in the form of a government loan. This loan is paid in fortnightly instalments or a twice yearly lump sum up to the rate of 150% of a full Age Pension.

Those with insufficient retirement savings can unlock a portion of their home wealth to access income and/or capital to provide more flexibility and choice in their later years. A Household Loan is often more suited to covering some of the major components of long term retirement – refinancing a bank mortgage or other debt, renovating the home for age-appropriate retirement, funding aged care and potentially giving to children and grandchildren through the ‘Bank of Mum and Dad’.

Why not find out how much of your own wealth you could access by using the Home Wealth Calculator. It’s quick and easy to use.