self funded retirees, self funded retirement, retirement income streams

Managing a self-funded retirement

Three things you need to know

There are many misconceptions about self-funded retirees. One of the main problems is that this income status tends to become conflated with the popular media myth of ‘greedy, rich baby boomers’. Not all retirees are baby boomers. Most are not ‘rich’. And like the rest of the human race, a tiny per cent may or may not be greedy.

Being self-funded is really quite a narrow definition. It means that you are not eligible for an Age Pension or have forgotten/decided not to apply.

If you are ineligible, it does not mean you are overly wealthy. You may be single, live in a home below the median value of houses in your suburb, but have just over the asset threshold of $656,500 which means you need to live off your own income. If we assumed this to be a net amount of $39,500 for the past year (based upon a 6% return), then it hardly translates to a luxury lifestyle.

Overall, self-funded retirees comprise about 30% of all retirees. Our experience in dealing with these older Australians has revealed three fundamentals which we believe to be worth sharing.

The main factor underlying each of the following points is that managing your income is very similar to those on a full or part-Age Pension. It is never a set and forget proposition. The rules, the goal posts – and some might even say, the umpiring – are changing frequently. It is up to you, as captain of your own ‘money team, to remain vigilant and nimble and informed.

Here’s our top three tips.

Your status will probably change – as will your source of income

Most people who commence their retirement self-funded will end up on at least a part-Age Pension at some point in their lives. Whilst about 30% of retirees start with a private income,  this shrinks to 20% by the time they reach their 80s. This is because they have generally drawn down enough of their super or other investments to fall below the asset or income thresholds and then will qualify. This is a fact worth mentioning as those who are self-funded should keep an eye on their potential eligibility and apply for an Age Pension as soon as it is feasible. Centrelink won’t backpay you because you applied later than you needed to. You can easily keep track of your potential eligibility by checking our free Age Pension Eligibility Calculator at any time. Those who still do not qualify for an Age Pension will most likely be able to receive a Commonwealth Seniors Health Card (CSHC) instead. This same calculator will help you determine your status if this is the case.

The rules matter

Whether on a Centrelink payment or not, knowing the rules that guide your retirement income is essential. Yes, there are so many rules. And yes, they can be confusing, complex, sometimes even seem contradictory. We are not suggesting that you enroll in a finance degree in order to keep up. What we do believe, is that it is important for you to understand at least as much as is legally appropriate. And to seek advice on the finer detail when necessary. For instance, should you have a Self-Managed Super Fund (SMSF), the regulations are very stringent. You will probably be a director or a trustee for this fund, in which case your obligations are clearly spelt out and must be followed. It’s your job to know them and observe them and to seek support to do so when necessary. Put simply, Self-Managed Super Funds are not for the faint hearted. Another instance where there can be a lack of understanding of rules and reporting for self-funded retirees is when it comes to income streams. Says Steven Sadler, Head of our Customer Services Team, 

We are forever encountering SMSF owners who strongly believe “I don’t have an income stream or Account-Based Pension, I just have an account that I make the minimum required drawdown from each year” or similarly “It’s not a pension account because I just take one lump sum withdrawal of minimum amount required.” We spend a lot of time explaining that this is not the case.’

This view of income streams is just incorrect and means that the information offered by these retirees may ultimately cost them money. Knowing how superannuation works and what constitutes an income stream is a foundation of your understanding of retirement income. If you are not sure of this aspect of your savings, seeking guidance through an Understanding more about super consultation is a quick and easy starting point.

Options, options, options

And you have so many. Just as your status may change from self-funded to receiving an Age Pension entitlement, so do the many ways you can contribute to and draw down from your savings. It’s all too easy to think you have a certain nest egg and that you can set up an income stream, and if you don’t draw it down too quickly, you can live off this money for the foreseeable future. But that is an extremely passive – and potentially costly – strategy. There are a wide range of options available for those who are self-funded to actively manage their savings and use the rules to maximise this money. These include rules on contributions (Carry Forward, Bring Forward, Younger Partner), on home equity contributions (Downsizer) on gifting (as you move towards Age Pension eligibility) and on taxation. Again, you don’t necessarily need to be aware of all the detail. But it is important to know that, for instance, a couple might be able to ‘upsize’ their super by about $600,000 if they are selling the family home. 

The major takeout from our three important reminders is that you will do yourself (and others) a great favour if you know about the range of options and opportunities open to those who are self-funded retirees. Just don’t be afraid to seek guidance if and when needed.

Next steps

How long will your money last? And how can you make it last longer? A guided advice consultation using the Retirement Essentials Retirement Forecaster is a great start to learning about the many ways of stretching your savings

You may not be receiving an Age Pension, but you almost certainly can get a Commonwealth Seniors Health Card – find out more here or you can seek help with your application.

If you feel your understanding of how super works and how it can work better for you is insufficient, a tailored Understanding more about super consultation will be useful.

What’s your view?

Do you agree with these three fundamental points? Or are there others you feel that self-funded retirees would benefit from? We’d love to learn from your experience.