Don’t make money mistakes that you can’t undo

It’s never too late to manage your money more effectively whether for – or already in – retirement.

But there are some money mistakes that should be avoided at all costs – those that can leave you with a lifetime of regret.

Today we recount stories of five very avoidable mistakes (not using real names). These examples are not intended to alarm you, but rather to encourage a review and  – if needed – a rethink of your strategies to ensure that you are maximising your potential income – and not the opposite.

1. Spending too little

Misunderstanding minimum withdrawals

John and Maya both retired as soon as they could, which meant 69 for John and 67 for Maya. As homeowners, they had (combined) a super balance of $380,000 (well below the asset limit of $470,000 for a full Age Pension as well as deemed income limits). So they have been living on a full Age Pension of just over $45,000 per annum. They believed that they were also able to withdraw super at the rate of 5% per annum as a top up. This amounts to $19,000 per annum, which makes their total retirement income about $64,000 per annum. They had plans to manage this income fairly frugally in order to travel every two years or so, for five weeks in Australia or the occasional three week trip overseas. Their house is large and has required quite a lot of their income for maintenance and minor, age-friendly, upgrades. But their plans are now unlikely to come to fruition, as John has received a diagnosis which suggests he has less than two years to live. They have maintained health insurance so believe that their medical bills will be largely covered. But the lost opportunity to have more adventures together is now a painful reality.

What was the mistake?

The required minimum withdrawal is just that – a minimum. John and Maya could have withdrawn a higher amount and travelled earlier without significantly reducing their longer term financial security.

Is this reversible?

No one can see misfortune heading their way, but misunderstanding a minimum amount to be a maximum amount has resulted in a more frugal retirement than is necessary.

How to understand the ‘right’ amount to withdraw?

This varies from one retiree to the next, but using the Retirement Essentials Retirement Forecasting Tools can assist you to compare scenarios if you increase or decrease your spending levels – and the effect this will have on how long your money will last.  

2. Spending too much

Forgetting that most retirements last for decades

Manoj (64) and Devi (62) had a similar level of super savings to John and Maya, but approached their retirement in the opposite fashion. Both retired soon after their Age Preservation age (of 60). They are strong adherents to the YOLO attitude (You Only Live Once, so just do it!). So together they withdrew a combined lump sum of $100,000 from super as soon as they could. They spent this money on home improvements and some very high-end entertainment. They also showered a lot on their adult children. They both established Account-Based Pensions (ABPs) to replace previous salaries and two years down the track they have withdrawn another $160,000 (combined) for living expenses. Now, with three and five years respectively before any Age Pension entitlements can be claimed, they have realised, on the current rate of spending, their super will be close to exhausted. And apart from the family home, they will have nothing except the full Age Pension to support themselves.

What was the mistake?

It’s fair to say that Manoj and Devi did very little forward planning, given that their possible lifespans are at least mid-late 80s. Spending up big in the early years can be even more harmful than living too frugally. It’s really important to understand how best to maximise your super across a 30-year retirement journey.

Is this reversible?

Potentially. Manoj and Devi are still relatively young and fit. It’s worth exploring whether they might fully or partly re-enter the workforce and maximise all the super rules possible to contribute as much as they can to supplement the full Age Pension they are likely to receive. Separately, they may wish to ‘practise’ living on a full Age Pension payment ($45,037 per annum ) in order to understand how this works for them. If this is not a comfortable amount, they may need to consider the family home as an asset which could be downsized or from which equity can be withdrawn. But very specific rules apply; using the asset of the home in retirement is a big decision.

How to understand the ‘right’ amount to withdraw?

Again, this is highly individual, which is why using the Retirement Essentials Retirement Income Forecasting tool will enable you to compare the scenarios open to you, and relevant to your particular situation.

3. Applying too late for Age Pension benefits

Whoops, there went $25,000…

At 72, Barry is still working as a carpenter. He has always assumed that he has too many assets to receive an Age Pension, but never really checked. In reality he would have qualified about four years ago as asset limits for a part-Age Pension are adjusted twice a year, and Barry hadn’t really kept up with these thresholds. As well as the part-Age Pension payments, he would have had the really useful Pension Concession Card. He now finds it hard to get through the five-day week but wants to continue at work a couple of days instead, so he’s approached our Customer Services Team to check his eligibility. Sadly it seems he has missed out on about $6200 in benefits each year, for four years. He was quite good natured about this amount of lost income, but did wonder if he’d feel so exhausted if he’d reduced his hours a few years earlier.

What was the mistake?

So many people believe they will never qualify for an Age Pension. But, over the course of a lifetime, 80% will. Check your entitlements now, and at least twice-yearly, so you keep on top of how much you can get and the limits which change every March, July and September.

Is this reversible?

Foregone Centrelink entitlements will not be paid, unless Centrelink has made an error. So Barry has missed out, but he has now been assisted with his application and hopes to be receiving a fortnightly Age Pension pay cheque very soon.

4. Not knowing the younger spouse rules 

Couples’ super savings can be treated differently

Henry and Angela assumed that their joint assets would be assessed for Age Pension eligibility and that they would miss out. Their assets do matter, but differently as Henry is 68 and his assets are in spending (decumulation) mode and Angela (60) has her super in saving (accumulation ) mode. Henry’s assets will be assessed and deemed. Angela’s will not, as ‘younger spouse’ super savings, if in accumulation, are exempt from the means test. Henry can go ahead and apply for the Age Pension while Angela’s assets remain in accumulation.

What was the mistake?

Not understanding how super rules apply to couples. By not checking how this works, Henry has lost at least 12-months of a part-Age Pension entitlement.

Is this reversible?

No, this money is lost, but Henry can apply immediately as he will be eligible for a modest fortnightly payment. And Angela can time her own conversion of her super from saving to spending, to suit both their needs and ensure they are taking maximum advantage of the rules. Angela was also surprised to learn that even if her savings were in decumulation phase, she is allowed to ‘roll back’ these funds to take advantage of the ‘younger spouse’ rules.

5. Thinking gifting reduces your assets 

Giving large sums to family doesn’t always help

“But I gave it away”, was the response from Julia when her Age Pension was abruptly reduced. She had recently received a small inheritance from her uncle and realised that this amount might tip her over the limit, asset-wise. Fearing the loss of her Age Pension, she hastily gifted just on $90,000 to her three children, believing this money had been successfully ‘shifted’. Not so, unfortunately, as the gifting rules are clear that you can give up to $10,000 per year with a cap of $30,000 over five years. The excess gifting will be regarded as a deprived asset by Centrelink, deemed to earn income also, and so Julia’s intention has not worked. 

What was the mistake?

Again, checking rules on assets that are assessed and deemed and those that are exempt is critical. Had she realised the gifting restrictions, Julia could have gifted to her children up to the Centrelink limit and then used the balance of the money on two things she still wants to do – a partial home renovation and a trip to New Zealand to visit family. As the home is an exempt asset, money spent on it is not counted toward any Age Pension assessments. So her payments would not have been reduced.

Is this reversible

Not really. Julia is talking to her kids about paying back the money and then using it on the home and a holiday but Centrelink is not guaranteed to reclassify this amount and the rule on deprived assets is applied for five years.

Is there a moral to these stories?

Rather than a moral, these examples provide a cautionary note. Most retirement income journeys have predictable trigger points which lead to key decision-making times. Knowing all the ramifications of such decisions before jumping in means that you are giving yourself the best chance to make smart decisions – and maximise your dollars.

Find out more about these trigger points:

• Understanding super
• Retirement income forecasting
• Age Pension rules and applications
• Younger spouse rules
• Maximising Age pension entitlements

What’s your story?

Have you nearly made an irreversible mistake?

Or been caught out by rules that are less than clear?

This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.