Adviser Megan Marshall recently met with Gary and Monica who have retired. They’ll soon qualify for an Age Pension but want to know whether a renovation or downsizing their home is the smarter financial strategy. Talking them through the rules and the likely effect either decision would have on their retirement income made Megan realise that this dilemma was worth sharing with all our members.
We spoke with her just before Christmas to get a little more background on the work she does in strategy consultations.
‘What I love the most is helping people understand how to retire comfortably. It’s all about clarification and information, which gives them the confidence to understand their options. Most people come to us with a clear sense of purpose. They just want some bite-sized advice to meet their current needs, not necessarily a complicated ‘whole of life’ plan. We offer great value, with full transparency of fees. We charge a fee for consultations; consultations that are targeted to solving specific issues which frequently arise in the lives of retirees. Things like paying down a mortgage, or better understanding superannuation options, or using downsizer contributions.
‘The fact that we can help them understand the rules, ranging across tax, Centrelink and superannuation, and how intertwined they are, is very satisfying. We take out the jargon and demystify information which may be spread across five pages of the Services Australia website! That’s what I love about what I do. Problem solving!’
Back to Gary and Monica and how they were guided through their options…
Which home will be better?
As we mentioned, they were weighing up whether to downsize their home to a newer, more comfortable property or to renovate their current home. They love their neighbourhood which is close to family and friends but would like a home that requires less maintenance. For them, fully enjoying their retirement means the opportunity to travel for longer periods. Lower home maintenance is a key part of this plan.
During their strategy consultation, Megan was able to talk them through two different scenarios. Their starting point, before either renovating or downsizing, is that they are likely to be eligible for $950 per fortnight ($24,700 per annum) in Age Pension benefits. Here’s how this entitlement might change, depending upon whether they proceed with a renovation or with a sale.
Option #1 – Downsize
If they downsize their home they believe, after costs, they will have surplus funds of $200,000. These funds will then be assessable by Centrelink, both as an asset and deemed as income, now that this money is no longer in the value of their home, which is exempt from the means test. This would result in $600 per fortnight ($15,600) less Age Pension. It would therefore increase their reliance on their own assets to fund their retirement. But of course they do have that $200,000 in the bank account so their own assets are now much greater.
Option #2 – Renovate
Gary and Monica believe that renovating their current home will cost about $150,000. This reduces their assessable assets and deemed income, as they have shifted money into their home, which is an exempt asset. This results in $450 per fortnight ($11,700 per annum) more in Age Pension benefits, therefore reducing their reliance on their own assets to fund their retirement.
While either of these outcomes might appeal, for different lifestyle reasons, it’s important to check in both scenarios that Gary and Monica’s assets which are available to fund their retirement, will be able to last the distance.
Using the Retirement Essentials Retirement Forecasting Tool, Megan was able to show Gary and Monica that in both scenarios they could afford their retirement income goals. Their wealth at age 95, however, was approximately $100,000 less in Option #1 than it was in Option #2.
Gary and Monica were grateful to learn that either way they were going to be comfortable and weren’t too concerned about the lower wealth at age 95, as their home could also form part of the inheritance for their kids. It’s also difficult to accurately predict real estate prices that far out, but a substantial renovation is sure to have added value to this primary residence. Having this information gave both Gary and Monica confidence in their decisions, removing uncertainty and boosting their feeling of control over their retirement lifestyle. Which brings us right back to why Megan loves her work!
The Retirement Essentials advisers can evaluate how long your retirement assets might last and what your financial position may look like over the coming years in our Strategy Consultations, which are designed to help you feel more confident about your retirement future.