The five big retirement spends: Can you afford any or all?

The three main ages at which Australians access their super savings are:

Preservation age – once you have turned 60 and retire or significantly reduce your working hours.

Age 65, at which point you are able to access your super without restriction regardless of whether you are still working.

Age Pension age, or thereabouts – when you are between 67 and 70 and alongside the Age Pension application process, you decide to also access your super.

These are general trends, rather than rigid definitions. But the decade between 60 and 70 is definitely the time when most people start to access super, usually through a combination of regular income payments and occasional lump sum withdrawals. And our team of very experienced retirement advisers have discerned a pattern of spending that reveals the top five ‘one-off spends’ for such retirees.

Whether you choose to spend on item one, three or all five from the following list is not the most important aspect of using a lump sum from your super. The critical need is to choose the most effective way to use your funds to achieve your desired goals across your retirement years. It’s also really important to get the timing right so you maximise your income at every opportunity.

Bearing in mind that there are no hard and fast rules, and that every individual’s retirement situation is different, here is a quick overview of the five most common ‘spends’ and some of the rules you’ll need to know when you decide where your hard-earned funds will go!

But first, a caveat.

Before you do anything else, the important first step is to ascertain whether you will, at some stage, be eligible for an Age Pension. And if so, approximately when, and how much you’re likely to receive. Why? Because you don’t want to be inadvertently breaking Age Pension rules (particularly gifting) which might reduce your later retirement income because you were unaware of the repercussions.

(And yes, we understand that a high proportion of super savings are converted into retirement income streams. But that is income, as opposed to spending, so it doesn’t make the list.)

OK! Let’s work our way through the top five in order of the most popular, according to Nicole, Andrew, Amanda, and David.

Spend #1 – Travelling far and wide

Travel and baby boomers seem to make for a wonderful combination. And don’t boomers prove this point with recent data from Tourism Australia suggesting that it’s the 60+ age group who take the longest trips both domestically and internationally every year. Many Australians long for retirement to finally have time for extended touring, be it Aussie road tripping or extended stays in Asia, Europe and beyond. But are there any pitfalls to following your travel dreams?

Can you afford it? No one can tell you not to travel if it’s a long held dream. And yes, the subtext is usually, ‘One day I’ll be dead’. But the critical question to ask yourself is whether you can afford the type of trip you want – and if you are unsure, to forecast the impact on your future income taking this expenditure into account.
Have you also modelled what many modest trips do to your income, as opposed to one big splurge? If, for instance, you withdrew $60,000 for a high-end world cruise at the beginning of your retirement, your capital may be depleted and unable to recover sufficiently to deliver a sustainable retirement pay cheque. If, instead, you took six trips which cost around $10,000 over a period of 10 years, then your core savings may have time to earn and compound and may last longer across your full retirement. Modelling these scenarios is a really great way of testing your options.
Being realistic about your energy levels and physical capacity is really important. Creating wonderful memories while you can enjoy them to the fullest is the goal – and for many couples there is the desire to do so while they can both still travel together. Singles also often want to head off while they enjoy physical independence. So timing your travel is everything. A financial adviser can help you model the money and give you the confidence to book the trip.

Spend #2 – Home renovations

The busy working years are rarely the best time to undertake home renovations. It can be difficult to be available for builders and tradies; full time work is enough of a load without part time construction management. But come the transition from full-time work to part time or zero hours, and many of us start to notice the niggling faults of our home sweet home. Taking a pause from work to revamp the family home suddenly sounds appealing. so what do you need to know about using retirement savings for this purpose?

If you have Centrelink benefits, or are likely to, you are probably moving funds from a deemed asset (bank account or super balance) to a non-deemed (i.e. exempt) asset, your primary residence. This change in assets needs to be factored into your income calculations. These expenses will also need to be reported, so make sure to keep receipts.
As with some government budget deficits, house renovation costs can suddenly balloon. Very few renovators seem to complete work under the stated cost. It’s critical if you have very little discretionary income coming in that you do not overspend
Renovations aren’t just about updating – they are a great way to ‘futureproof’ a much-loved home, ensuring it suits your changing needs as you age.

And finally, if your home really doesn’t suit your needs any longer, then downsizing can offer a great option to top up super (instead of spending it) and to secure accommodation that will suit you better for the years ahead. In the right circumstances, a downsizing strategy can provide the benefit of a more suitable, lower-maintenance home and an opportunity to top up your super balance with leftover house sale proceeds.

Spend #3 – Choosing the right retirement car

Many people find the joy of leaving work is somewhat mitigated by the need to hand back the keys to the company car … meaning they now need to buy a replacement! Others find the car they have needed as a family is no longer appropriate for a one or two person household and with some relief, they turn to a more modest vehicle with lower running costs. Others want to switch to a more environmentally friendly model – or perhaps find a 4WD that suits a jaunt with the grandkids. Whatever the choice, as long as the new vehicle is affordable, it’s your call.

However there are some important financial effects to factor in:

It is not always easy to get a loan or lease at an older age. Make sure that you check this out before committing to a purchase that you need a loan to fund.
If you have an Age Pension, then taking money from a bank account or super involves moving funds from a ‘deemed’ financial investment to a non-deemed (exempt) asset class. This may result in an increase in Age Pension entitlements.
Those receiving pension entitlements will also need to advise Centrelink within 14 days of the transaction.
Keep an eye on depreciation of any vehicle you own, and report this to Centrelink as it can often incrementally increase your entitlement.
New cars lose value the moment you drive one out of the showroom, so considering a ‘demo’ model reduces this ‘loss’.
The RedBook website is very handy for valuations of all makes and models.

Spend #4 – Reducing your mortgage

Using super to pay down or discharge a mortgage is a very common goal when super becomes accessible. Given that more than half of 55-59 year olds are now entering retirement with household debt, it’s hardly surprising that the money sitting in super looks very appealing to solve the constant drain of repayments. But as with many retirement income decisions, there are upsides and downsides of transferring a lump sum from your super to pay down the loan. Here’s a brief summary of things to think about:

Once you withdraw money from super, there are restrictions on how much you can put back in due to contribution caps and age limits.
Paying off your mortgage reduces your debts and can lower living costs, but it also reduces the capital you have invested to generate income later.
It’s important to consider how this impacts your eligibility for the Age Pension, which depends upon your assets and income.

Spend #5 – Establishing a Bank of Mum and Dad (BoMaD)

This may not be for everyone, but a reasonable percentage of older adults believe this use of their money to be one of the most worthwhile things they can do. ‘Giving while living’ can feel much more satisfying than leaving an inheritance. And given the challenges for 30 and 40-somethings to buy a first home, many retirees believe a wealth transfer is the best way to set their kids up for life. But there are many traps for the unwary. Here are a few considerations to ponder:

Gift or loan – legally these two bequests are different. They also have different ramifications for Centrelink benefits etc. Here’s an overview of gifting rules
Make it legal – just handing cash over can be a bad decision. Being clear about what the money is for, how long the loan is, expected repayment schedule and any interest are basics. Having a lawyer create a contract to cover the main terms and conditions can save heartache and family disruptions later on
Is it fair to all your children? This is your business and your decision, but don’t hope the disadvantaged offspring will never find out. Be clear in your decision and capable of explaining it.
Can you afford it?
If partnered, is this a shared decision?

What’s your view on this ‘top five’?

Does it resonate with your own decision-making?
Or is it too soon to tell how you want to use your super?

Need further support?

Many of the decisions about spending lump sums involve knowing Centrelink and superannuation rules. To use a finance term, they are often about ‘asset restructuring’ which is another way of saying, what you have, in what form and how moving funds can create tax or entitlements benefits – or penalties. If you are unsure of the rules or wish to test your decisions before committing, an advice appointment may help clear up the ‘unknown unknowns’.

Starting points:

If you have absolutely no idea where to start or which appointment might suit you best, the free 10-minute Retirement Consultation is a discussion about which advice support will best suit your individual circumstances

An Age Pension Entitlements Consultation suits those who wish to apply for benefits or to maximise those they are receiving.

Retirement Advice Consultations allow you to have a tailored discussion about any retirement income or planning issues. They are particularly helpful for viewing your retirement spending forecasts and helping you understand how to make your money last the distance.