How to retire richer: avoid these 10 key mistakes with money

Tax, pensions, wills, advice and superannuation create complex issues, and retirees who get it wrong can lose big bucks.

Within five years Australia is set to have five million retirees, up to $5 trillion in superannuation nest eggs, and more than $200bn each year transferring to younger generations through inheritances.

Amid this mountain of money, mistakes are being made when it comes to taxes, pensions, wills and advice that can potentially cost retirees tens or hundreds of thousands of dollars.

AMP says more than 670,000 Australians intend to retire by 2028, and warns a lack of confidence around retirement savings and strategies means many are spending frugally and not enjoying the lifestyles they can afford.

Its recent research found 60 per cent of older Australians wish they had started planning earlier, and three quarters find the retirement system complex.

AMP head of technical services John Perri said sometimes the wrong decision was made by not doing anything at all.

“I’m worried about people getting information from friends of friends, or people down the pub,” he said.

“People don’t know what they don’t know, and they’re making some major life decisions.”

Money coach and Women Talking Finance founder Karen Eley said the lack of confidence caused fear and stress about making mistakes.

“Now they’re at the end of their working life, they know they can’t afford to make mistakes with the money they have left to fund the rest of their life,” she said.

Seniors worry too much about running out of money, experts say. Picture: iStock

“Superannuation and Centrelink are extremely complex systems, and subject to regular changes by the government.

“This is okay for individuals who can afford to seek advice from a financial adviser, however those with less than $150,000-$200,000 in retirement assets find it extremely difficult to either afford or access advice.

“Unfortunately, not getting advice can be costly due to missing out on benefits, investing and market mistakes causing losses, or incurring unnecessary tax.”

These money mistakes can potentially turn golden years into an unpleasant shade of brown.

1 BEING TOO FRUGAL

Later Life Advice founder Brendan Ryan said it was a challenge for many seniors to enjoy retirement because they worried too much about running out of cash.

“You are drawing down assets and that’s a mental shift – not everyone can just live off the interest,” he said.

“People end up eating cat food when they could have a much better time.”

Mr Ryan said retirees’ income typically came from their own superannuation pension, drawing down on their assets, and the age pension, “and that mix moves over time”.

“It’s hard to get comfortable with,” he said.

The pension is a safety net as other assets dwindle, and it currently pays a couple more than $800 a week – almost $43,000 a year

“You can work on the Moneysmart.gov.au calculator,” Mr Ryan said. This retirement planner tool allows you to punch in super balances and income, and will show how your assets and/or a pension provides income during retirement.

2 PAYING TOO MUCH TAX

Superannuation can be tax-free for a majority of people aged over 60 if they get their structures right.

Mr Ryan said some retirees wasted money by keeping their super in the accumulation phase, where earnings are taxed at 15 per cent, rather than switching it to an account based pension with zero tax on income, capital gains and withdrawals.

“I have seen a lot of that lately – there’s a chance to start drawing down on your super and switch it to tax free,” he said.

3 WRONG ASSET VALUATIONS

Pension assets and income tests are relatively generous, but having higher-than-necessary valuations on your car, caravan and other assets means less money for many people.

Centrelink only requires the second-hand value of household items, not their insurance value or replacement value.

“Just assume you are having a garage sale – make sure you have the right values in there,” Mr Ryan said.

“If your car is in there at $40,000 and it’s only worth $20,000, be more realistic about asset prices,” he said.

4 GIFTING DANGEROUSLY

People on a part or full pension can only give away a maximum of $30,000 over a five-year period without it counting in their pension asset tests for five years. And there is a maximum of $10,000 for a single financial year.

This means plans to give the kids an early inheritance and boost your pension may need to be made well in advance.

AMP’s Mr Perri said gifting was the most common question his team received from financial planners “and a lot of the time it’s after the event”.

“Gifting is the one that many people need to get some information and education about – it is fraught with danger, because it’s almost impossible to unwind,” he said.

“The rules say if you give it greater than five years before you qualify for the age pension, it will be ignored.” If taking this path, working out just how much you will need, and what you can afford to give away, is likely to require expert advice.

5 PROPERTY INVESTMENT WITH CHILDREN

The Bank of Mum and Dad often helps their children buy real estate through financial gifts, loans or going guarantor on their mortgage.

Increasingly, “more and more they are buying the property with their kids”, Mr Perri said.

“The rising equity in that purchase could push the parent over the assets test cut-off point and affect age pension eligibility,” he said.

“It’s not a problem if you are not going to receive an age pension,” he said. But people on part pensions that were asset tested could potentially see surging property prices wipe out their pension income.

6 LEAVING EVERYTHING
TO A SPOUSE

A big financial trap can emerge when one member of a pensioner couple dies, and their assets automatically go to the surviving spouse – pushing them over Centrelink assets test limits and crunching their pension payments.

“Some people end up losing their age pension completely,” Mr Perri said.

Careful estate planning can prevent this costly outcome.

“Talk through what you want to do,” Mr Perri said.

“They could, via their will, choose to skip the spouse so money instead goes to kids or grandkids, while making sure the surviving spouse is still looked after with income,” he said.

“This only works with assets where the surviving spouse is not a joint owner.” These might include share portfolios and cash deposits.

7 FAILING TO TALK, OR LISTEN

Money talk is still taboo for some people, especially when it comes to retirement, inheritances and estate planning.

“Some people don’t want to discuss what happens on death,” Mr Perri said.

“Some of it is culture, some is upbringing, some don’t ever want to deal with the future.”

Ms Eley said people could do their own retirement financial research on moneysmart.gov.au and servicesaustralia.gov.au.

And seek advice, she said. “Contact your super fund and speak with a support person, and for Centrelink benefits you can contact a Financial Information Service officer, which is a free service to understand the benefits available.

“Or speak with a financial adviser who specialises in retirement advice.”

8 DOWNSIZING DILEMMA

There are superannuation incentives for retired couples to downsize their home, but it can sometimes be a mistake that cuts pension payments dramatically.

“While downsizing offers attractive incentives to release home equity to assist in funding retirement or topping up super, it can also have Centrelink implications for the asset test,” Ms Eley said.

Money coach Karen Eley says consider financial factors if downsizing. Picture: Supplied

That’s because your own home is exempt from Centrelink’s assets test but cash and other investments are not.

“These need to be considered when thinking about selling the family home and downsizing,” Ms Eley said.

9 IGNORING INSURANCE

Seniors sometimes continue paying hefty life insurance premiums long after their mortgages are repaid and children have left home.

This could be unnecessarily eating into their nest egg.

Another mistake was failing to review general insurance cover, Ms Eley said.

“Often retirees have their contents insured for their current valuation, and with cost of living and CPI increases, it’s worth reviewing policies to see if they need to change some of their household item insurance coverage to replacement value,” she said.

10 MISUNDERSTANDING INCOME PRODUCTS

TelstraSuper CEO Chris Davies said new annuity-style retirement products were emerging and could help allay fears of retirement money running out.

“We expect that the recent cost of living increases and investment market volatility will see more retirees consider guaranteed lifetime income products, particularly as they see the impact that market fluctuations and inflation can have on their retirement savings,” he said.

“Modern annuity-style products – such as guaranteed income products offered by super funds – can be linked to the Consumer Price Index, mitigating this risk.

“Unlike the old-style products that were inflexible, the new generation of lifetime income products deliver better outcomes to members … they can be particularly advantageous for those being assessed for the age pension under the assets test – as only 60 per cent of the asset is counted.”

Mr Davies said the new products would not replace traditional account based pensions, formerly called allocated pensions.

“We expect most of our members will utilise both for added income certainty and to preserve capital,” he said.

“A typical scenario could be a member investing 20 per cent of their super into a lifetime income product, while also drawing an income from the other 80 per cent via an allocated pension.”

Originally published as How to retire richer: avoid these 10 key mistakes with money