Self-funded retirement: seven traps that can trip up seniors’ wealth

Retirement becomes tougher when living costs rise, but there are moves seniors can make to strengthen their finances.

Most Aussies would prefer to be self-funded retirees if given the choice.

While the traditional belief among some of “I paid taxes all my life so the government can pay me a pension” might seem like a decent payback, the actual payout is too puny for many, with a single age pension worth $28,500 a year.

Living on less than $550 a week won’t be enough to produce the lifestyle that many of us want.

Nice new car and caravan? Forget about it. Fancy holidays? Not a chance. Paying for groceries, power, fuel and insurance with ease? Good luck.

A self-funded retirement is a worthy ambition that delivers financial freedom, choices and independence.

But there are traps lurking, and some common errors that can cost self-funded retirees dearly.

1 OVERLY-CONSERVATIVE INVESTING

Retirement should never mean putting everything in cash because you can’t stand a share market correction. Today, people are often retired for 20 or 30 years, and the low returns paid by bank deposits are unlikely to keep up with inflation. Most advisers recommend having a diversified investment portfolio.

2 NOT SPENDING ENOUGH

Some retirees are too conservative around preserving their nest egg, and may miss out on experiences and opportunities that they spent their working lives saving for. The most active years of retirement are the first decade or two, after which household spending drops significantly. Enjoy life while you can. There is always the safety net of an age pension.

Seniors can stay on track financially by continuing to think long term. Picture: iStock

3 UNDERESTIMATING EXPENSES

The rising cost of healthcare, insurance, food, aged care and other costs should be factored into budgets and forward planning. Advisers and online tools can help. Author and financial adviser Helen Baker says some retirees think they have enough, then go broke because they spent everything or gave away too much money.

4 TAX AND SUPER MISTAKES

Superannuation and tax rules are a minefield, and thousands of dollars can evaporate through a failure to understand financial strategies and laws. Think capital gains tax for investments outside of super but zero CGT on assets in account based pensions, super contribution caps that can deliver big tax deductions, and spouses splitting income and assets to maximise they money they get.

5 NOT SEEKING HELP

Baker says self-funded can often mean self-managed, but changes in legislation, markets and family dynamics can lead to mistakes and missed strategies. “Sometimes we don’t know what we don’t know, and there can be smarter things to do to stretch your money further, avoid a mistake, or leave more wealth for charity, family or friends,” she says.

6 INHERITANCE DISASTERS

The high wealth of baby boomers, more blended families and second marriages, and complex rules around estate planning make wills, trust structures and good legal advice vital for self-funded retirees. Nobody wants their legacy to be a family war sucking money from their inheritance because their children disagree about who gets what. Baker says there are many smart structures available.

7 TOO PROUD FOR PENSION HELP

The age pension is set to climb again on March 20, to $29,024 a year for singles and $42,988 for couples combined. Qualifying for even just a dollar of pension can deliver retirees health, council, utilities and transport discounts, depending on where they live. Assets tests are generous – a homeowner couple can have $1m of other assets and still get some pension, while the Commonwealth Seniors Health Card only has an income test of $95,400 for singles and $152,640 for couples.

Originally published as Self-funded retirement: seven traps that can trip up seniors’ wealth