Retirement income is about more than just term deposits – a case study

By Kristopher Meuwissen

The last 10 – 15 years has been a wild ride for investors. Especially for retirees who need income.

Let me explain…

Since the global financial crisis (GFC) there has been a huge monetary response from governments and reserve banks all over the world.

That response is to lower the cash rate and add stimulus into the economy in an “anything goes” effort to kick start growth and keep people in jobs.

This financial monetary easing has done a few things really well.

1. It has seen one of the largest international share market booms in history.
2. It has driven the cost of housing in Australia through the roof as people have had the capacity to borrow more money.
3. It has almost destroyed the ability for Australian retirees to rely solely on more secure investments like term deposits.

Coupling retirees struggle with generating income through traditionally low risk investments with a longer standard of living and an aging population and you begin to have the makings of a disaster waiting to happen.

So what specifically is the problem?

The problem is that someone who is 70 years old and has saved one million dollars over their lifetime is faced with a troubling choice.

They can keep their money in lower risk assets like term deposits and receive maybe $10-15,000 per annum (which is definitely not enough)

Or

They can start getting creative.

There is a case to be made (and in my opinion this is happening all over Australia) that a retiree should just buy a beautiful (and expensive house) with their money and reduce their declarable assets so they can start to receive the aged care pension. The current rate for a full pension for a couple is just over $37,000 per year.

That means that a retiree is going to be better off on the age pension by a factor of two – three times than by investing their money in low risk investments.

It seems like a no brainer, doesn’t it?

Except it causes a lot of problems later on in life and people are unaware of how much risk they are taking by implementing such a strategy.

A couple of the risks involved are:

• Property is a growth asset and having all of your money tied up in one asset means you could lose a lot of money if property prices drop
• Property may be too much for an elderly person to upkeep and thus fall into disrepair
• The retiree may need to be placed into aged care which then may cause issues with the sale of the property or it may have to be sold in an inopportune time.

So what are the other creative ways for retirees to be able to generate income, take less risk and potentially receive the pension?

Annuities:

An annuity is a guaranteed income for your lifetime or a fixed term and can make up the backbone of your retirement plans. Annuities also have the added benefit of a part exemption from Centrelink which means that you will be able o receive the pension sooner and in greater amounts.

Annuities can be great but they have some down falls such as locking your money away which limited or no access.

Fixed Interest (Bonds):

Similar to term deposits, fixed interest can provide income through retirement and should definitely be considered as a part of an investment make-up for a retiree. Whilst it carries a little more risk they definitely offer stability for a retiree and allows for some certainty with long term income.

High Yield Growth Assets:

High yield growth assets can take shape in the form of high income property (directly held or real estate investment trusts) and high income shares (think Coles, BHP and the big banks etc.).

High income growth assets should definitely make up a small part of a retirees income stream because without it, you are completely beholden to interest rates which looks like they are going to stay low for a long time.

The final word:

Your retirement income should be made up of mostly lower risk assets with a small amount of money in some growth style assets. This should allow you the security that you can receive the pension receive long term income which will allow you to have your money outlast you and not have to scrimp and save every last penny.

If you are wondering what mix of investments you should consider, you need to speak with an experienced and licensed financial adviser.

Have some questions? Want to know how it applies to you? Want a review of your personal situation? Click here to book a Free 15 Minute Discovery Session, give us a call on 1800 577 336, or email us at hello@wealtheon.com.au.

If you’re heading towards retirement and want more resources and information about how to make sure you have enough money to fund the retirement you want, check out our other articles like this one: https://wealtheon.com.au/make-your-retirement-income-last-as-long-as-you-do/