Retirement income sweet spot and how to achieve it

Full age pensioners may need to plan in advance for larger expenses, such as overseas holidays.

The age pension just got better after a recent increase in payment rates. And if you target a strategy known as the “retirement sweet spot”, you do not need to have $1m in the bank to live like a millionaire in retirement.

From September 20, the full age pension increased to $29,754 per year for singles and $44,855 per year for couples.

Living solely off the age pension will provide most with a reasonable standard of living in retirement, especially for those who own a home outright and do not have to contend with rent. That said, full age pensioners may need to plan in advance for larger expenses, such as overseas holidays, by putting some of the fortnightly pension away into a separate savings account.

For those lucky enough to have accumulated superannuation throughout their working lives there is a strategy whereby you can supercharge your retirement income. The trick is to get the best of both worlds – receive a tax-free income stream from superannuation while also enjoying the maximum government age pension.

Known as the retirement sweet spot, the starting point is to understand when to retire and what level of retirement assets to target so that you can be right in the zone.

Having increased over the past 10 years, the age that people can access their superannuation in retirement used to be 55 but is now 60. Confusing for some, but the age that you can apply for the government age pension is not 60, but seven years later at age 67.

Age pension applicants must be Australian residents for at least 10 years, and have income and assets below certain thresholds which depend on relationship and home ownership status.

In terms of what is included as an assessable asset for age pension purposes, it is more or less everything that you own including, but not limited to, cars, contents, bank accounts, super and other investments. The only notable exemption is the family home which is also not capped. In other words, someone can live in a $20m mansion and if they have no other assets, are likely to be eligible for the full age pension.

Single homeowners can have up to $314,000 in assets and single non-home owners can have up to $566,000 and receive the full age pension. For couples, homeowners can have up to $470,000 and non homeowners can have up to $722,000 in assets.

These asset limits are key to the retirement sweet spot. Assume we have a couple who own their home and have $400,000 in super, and $70,000 other assets such as cash, cars and contents. If they stop working at age 67, they will be eligible for the full age pension of $44,855 plus also receive the pension concession card which is worth thousands of dollars per year in discounts.

In addition, they will be able to draw down from their super account – and if the investment return on the super account was 7 per cent per year, then the couple could draw down $28,000 per year and maintain the value of their super, or drawdown $37,750 and deplete the account over a 20-year period.

Between the age pension and the super drawdown, the couple will be able to enjoy an annual retirement income of between $72,855 to $82,605.

In contrast, a couple with $1m in super plus $70,000 in lifestyle assets would be ineligible for the age pension and would generate $70,000 per year based on assuming the same 7 per cent return.

Therefore the couple with $400,000 in super can out-spend the couple with $1m in retirement. That said, the wealthier couple have a larger safety net and greater ability to absorb lumpier one-off costs. This typically includes helping children into the property market, renovating the family home, going on holidays, care costs and ongoing medical costs.

If you wish to target the retirement sweet spot, the goal is to minimise lifestyle assets and get your super balance just below the relevant assets test threshold for the full age pension.

And if you are already over the threshold, spend money like there is no tomorrow. What you lose in capital could be made back through an enhanced ongoing age pension entitlement.

You can gift up to $10,000 per calendar year and up to $30,000 over a five-year period to reduce assets, but gifting more than this will trigger Centrelink’s deprived asset rules where the excess gift is counted as an asset for five years.

Remembering that the family home is exempt from the assets test, another popular way for people to increase age pension eligibility is to spend on the family home; outlaying $20,000 on a solar system and battery storage will have dual financial benefits. Not only will it reduce assessable assets by $20,000 and increase the age pension eligibility, but ongoing living expenses will also fall as less money will need to be allocated towards electricity costs – more income and less expenses.

As the retirement sweet spot has never been more attractive, people who have too much in assets for this strategy might consider retiring in their early 60s, draw down their super during the first few years of retirement and try to time things so that when they turn age 67, their super has fallen to the optimal level for the retirement sweet spot to kick in.

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au