retirement income, retirement trade-offs, mortgage or super, superannuation, retirement spending

Great retirement trade-offs:

And how to resolve them

Most of our life choices involve a trade-off. Should we eat the chips or lose a kilo? Should we book the holiday or save the money? Should we watch TV or go for a walk?

Retirement, too, involves some fundamental trade-offs, but often over the course of a 30-year retirement the stakes will be higher. Getting these decisions right is obviously very important. 

Many of these trade-offs are evergreens – dilemmas that face most retirees over the years. Sometimes there is an obvious financial advantage if you decide one way, but a less obvious health advantage if you choose the alternative.

For instance, choosing a holiday over putting money into savings may sound frivolous. But if you are suffering from burnout, the holiday may be exactly what you need to shore yourself up for the longer haul.

That’s not a bad way of thinking about most retirement trade-offs. Is the reward one of instant, but fleeting, gratification? Is there a longer term benefit with the alternative? And can you successfully evaluate the relative returns on each of the choices? Put simply, can you measure the benefits so you can objectively compare them?

Lurking beneath the following common retirement trade-offs is often a very real fear of running out of either time, money or both. At some stage you will have to decide which of your competing needs is most important. And to accept that we can rarely ‘have it all’ and that solving one major life stage requirement may mean delaying or forsaking another.

Here are our five great retirement trade-offs and new ways to think about them.

1. Working longer or starting retirement sooner

Choosing your retirement start date is a big decision. Many people assume that Age Pension age (67 from 1 July) is retirement age. Or that your Preservation Age is the date on which you leave full-time work. Neither are set in stone. Unless you are forced to step down due to retrenchment or for health reasons, most of us get to nominate when we will retire. And that just might be never! One way to think about  retirement age is to consider whether your Age Pension entitlements plus any super and other savings might fund about 70% of your pre-retirement after tax income. But so many other factors can weigh in – your partner’s needs and plans, your health, your post-work goals and other family issues. Financially, it is becoming easier for many Australians on the Age Pension to work more hours and to work later in life, due to the easing of income eligibility rules (in particular the current extra Work Bonus credit). Deciding the date to stop full-time work requires careful consideration of all these factors, but research does support the notion that those who transition from full-time via part-time or project work often manage to reconcile the need for the benefits of work (both income and social) and the ability to ease back, smell the roses and ‘get a life’. Easing back also provides the opportunity to sample retirement life and to establish new activities and friendship groups before the safety net of work income and connections is permanently removed.

Need to check the rules around your eligibility? Or discuss ways to maximise your entitlements? This affordable consultation could assist.

2. Pay down the mortgage or put/keep the money in super

A perennial dilemma for many Australians as they move from work to retirement, past Preservation Age. They can now access lump sums from their super accounts without penalty. So do you do this and reduce your mortgage thus saving interest repayments? Or do you continue to fund a mortgage, leave the money in super and hope it grows at a faster rate than the cost of your repayments?

There are no easy answers here as the best solution will be entirely dependent upon your overall financial situation and, often, your Age Pension eligibility. Moving money from a means-tested asset (your super) to pay down a mortgage may improve your Age Pension eligibility and thus your fortnightly income. But it is not necessarily the best use of a lump sum. For instance, organising household assets so that a greater proportion is in the younger partner’s accumulation account can also improve your eligibility. 

Any such decision may benefit from input from a qualified adviser who knows all the rules associated with super, Centrelink and how the asset of the family home can be best utilised.

Would it help to discuss your mortgage and ways to manage it in retirement? This consultation is designed to do just that.

3. Spend now or save for later

This is a fundamental question for most retirees, as well as one closely linked to the concern of running out of time or money. We are often told that we only live once, so the message to travel now, buy the shoes or order the champagne is compelling. But if we do those things too often, we can find ourselves spending at a rate that may quickly reduce our savings and super. Some delayed gratification may be needed. Accurately calculating the rate at which you can afford to spend, while leaving some funds in the kitty for your later years, is the best way to tackle this trade-off. Another aspect of this equation is the possible need for aged care support in home or perhaps in a facility in your later years. Knowing the rules around funding age care support helps as well. 

Would an accurate forecast of your likely income and expenditure over the coming decades help? That’s the reason we developed the Retirement Forecaster.

4. Give, gift or hold back?

The Bank of Mum and Dad is a significant source of funds in modern Australia. How much this cramps your own retirement lifestyle is up to you. Most parents find it hard to say no to a request for financial support from their adult children, particularly at a time of reduced housing affordability. But there is a cost to everything and such support can have a negative impact on your retirement income. Understanding the rules around both gifting and giving in retirement, as well as the legal aspects, is an important part of weighing up whether to join the Bank of Mum and Dad, or to keep the money in our own account for the meantime.

Need more information on how your gifts or loans will affect your retirement income? Perhaps an entitlements chat will help?

5. DIY or seek support?

According to research, this is one trade-off that matters a lot when it comes to increasing your financial wellbeing. Yes, it’s true that the financial advice industry has taken a bashing in recent years. That’s unsurprising given the poor practices revealed in the 2018 Royal Commission into the financial advice industry. But things have changed a lot since that enquiry, and recent surveys show that those who do seek advice are most likely to feel more confident about their chances of living a reasonable life in retirement. That’s unsurprising when the inputs needed to make sensible retirement income decisions are varied, complex and often require a thorough knowledge of tax, super and entitlement rules. To balance the discussion, having a clear understanding of your own financial situation is always the first step and that is a 100% DIY exercise. But when it comes to how you manage your assets, debt and potential entitlements, then checking in with a qualified adviser can often help enormously.

Would a tailored financial advice consultation add needed information to the work you have already done planning or managing your future income? A general advice consultation can be tailored to handle your most pressing concerns.

The term ‘trade-offs’ suggests that there is only ever one decision. But perhaps there is a middle way? The above options may seem black or white, but they do not always have to work this way. One example is the rate at which you spend (spend now or save for later?). Maybe you can plan to have a dream trip in the early, active phase of your retirement. But also plan to downsize and free up cash for your later years, by removing high home maintenance outgoings and using the profits to add to your super through a ‘Downsizer Contribution’. That’s just one compromise you can make; there are many more. Often it’s a case of talking through the trade-offs in order to uncover other ways of approaching these retirement dilemmas.

What do you think?

Have you made any of our great retirement trade-offs?

How are they working?