Retirees living like kings on the age pension using this little-known rule
Australian retirees are discovering they can live a champagne lifestyle on a beer budget in Southeast Asia on their age pension, thanks to a little-known Centrelink rule.
If you ask 10 people how much money you need each year in retirement, you will probably get 10 different answers. Some will say a flat figure such as $100,000 a year, while others will suggest that you aim for a percentage of your pre-retirement income, which could vary from 60 per cent to 100 per cent income replacement.
But thousands of Australians are living the high life on a fraction of what you think you would need for retirement.
New analysis from the Association of Superannuation Funds of Australia this week shows singles need $53,289 per year to enjoy a comfortable retirement, while couples require $75,319 a year. If you retire at age 60 and assume a 7 per cent return per year on your superannuation account, a single retiree would need about $750,000 in retirement savings, while a couple would need $1.05m to live off the super returns each year and not deplete the capital. But with the average retirement super balance being about $300,000 for men and $200,000 for women, the average person is likely to fall short of being able to enjoy a “comfortable” retirement.
Key milestone
Age 67 is a key milestone when it comes to retirement planning. It is the age that the Centrelink age pension becomes available and individuals can get up to $30,000 a year and couples up to $45,000 a year indexed for life and paid by the federal government.
This payment is of course subject to means tests, with single homeowners not allowed to have more than $321,500 in assets and couples $481,500 before their pension is affected. This increases to $579,500 for single non-homeowners and $739,500 for non-homeowner couples.
It is therefore not surprising that more people are choosing to work longer and only retire when they can get the Centrelink age pension. The Australian Bureau of Statistics data shows that 31 per cent of people aged between 65 to 67 are still working, while 12 per cent are still working beyond age 70.
Although the age pension costs the federal government more than $50bn year, retirees would be in serious trouble without it. Two-thirds of retirees over the age of 67 receive the age pension, of which almost half get the full age pension and rely on it as their primary source of income in retirement.
But alas, living on the age pension alone does not allow you to live a jet-setting lifestyle and it is not designed to do so. It is provided as a safety net to ensure that older people are at least able to afford the basics to survive in retirement. But some Australians have figured out a way to have their cake and eat it too. By living overseas in countries where the cost of living is a fraction of what it is in Australia, they are able to enjoy a champagne lifestyle on a beer budget.
Living large on less
How do the numbers stack up?
The average rent per month for a one-bedroom apartment in Southeast Asian cities such as Ho Chi Minh, Bangkok, Jakarta and Manila can vary between $500 and $1000. Add to that living expenses of between $800 and $1000 per month and Aussie expats can live very comfortably if they have between $1300 to $2000 per month, noting that the average income for locals is between $500 to $1500 per month.
Remembering that the age pension pays about $2500 a month for singles and $3750 a month for couples, older Australians can lap it up on their age pension alone in many Southeast Asian and South American countries.
And as a kicker, almost 80 per cent of retirees own their home outright. If the Australian expat decides to sell their Australian home, nets say $500,000 and invests it in super at a 7 per cent return, this adds a further $35,000 a year to their retirement income. This investment income combined with their age pension entitlement puts them in the top quartile of income earners in many countries abroad.
Places such as Bali even want to attract foreign retirees to live there and offer special retirement visas, which also provide income tax exemptions. The rationale from the government is that retirees are valuable just by living there as they will be spending their money within the local economy.
A little-known rule
But many will ask, how can someone receive an age pension while living permanently overseas? There is a little-known rule in the social security laws that states that as long as you were an Australian resident for at least 35 years between the age of 17 to 67, you can live wherever you want in retirement and still be eligible to receive the age pension.
Although your pension concession card will be cancelled after six weeks overseas, as well as some minor benefits ceasing such as the pension and energy supplements that help pay bills, the core age pension benefit will continue to be paid fortnightly, subject to asset and income tests.
Australia ranks as one of the top 10 countries in the world to live. However, if you only have the age pension as your primary source of income in retirement, you will have to closely monitor your bank balance and may experience limitations on how much you can enjoy yourself in your golden years. As such, a group of Australians have decided to pack up, sell up and leave family and friends behind in search of a better retirement abroad.
James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au
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