Beat the retirement sweet spot

For many Aussies, their income at retirement will likely come from a mix of superannuation and the age pension. The key is trying to get the balance right and one way to do this is to work out the sweet spot. This is the point where your super is at the maximum level before your age pension is reduced. 

Some retirees will find themselves with assets just beyond the sweet spot. In a nutshell, the challenge for these retirees is that they essentially have a 7.8% penalty for these extra assets - this is the amount of age pension they lose for accumulating additional assets. Why is this a challenge? Most assets won't provide a return of 7.8% to make up for the lost age pension. 

The sweet spot

Let's start with a closer look at the sweet spot using the example of a homeowning couple. They can have $470,000 of combined assets to still receive the full age pension. Assuming they have $50,000 in lifestyle assets (a car, furniture), that leaves them $420,000 of financial assets. At this sweet spot they will receive the full age pension of $43,750 for a couple and, assuming a drawing rate of 4.5% per year from their assets, a further $18,900 from their financial assets - a total of $62,650 per year for their retirement. 

As people accumulate more assets beyond this point, they start to lose access to the age pension. For every extra $1000 of assets they accumulate, they lose $3 per fortnight of age pension, or $78 per year (7.8%). 

Let's consider a homeowning couple with $1 million in financial assets and lifestyle assets that take their total assets to the upper limit for the asset test, $1,031,000. This couple will not receive any part age pension. Assuming that they withdraw from their financial assets at a rate of 4.5%, which is a sustainable withdrawal rate, they will have $45,000 per year in retirement. 

This demonstrates the challenge - the couple who have accumulated around 2.5 times the assets have, at first glance, have the lower retirement income. However, they are in the stronger financial position and there are a number of strategies they can use to take advantage of their relatively strong financial position. Let's take a look at six options.

Invest in a lifetime income stream

One option is to use part of your super to buy a lifetime annuity. The benefit is that the asset test generally only takes into account 60% of the value of the annuity. 

There are a variety of factors to consider in this decision, including the reduced flexibility that a lifetime income stream offers, however, it is a strategy to consider to reduce the value of assets to receive more age pension.  

If the couple in the case study with financial assets of $1 million were to use $400,000 of capital to purchase a lifetime income stream, they would reduce their assets by around $160,000 for the asset test and be able to receive around $480 a fortnight in part age pension. 

It's worth noting that higher interest rates provide more attractive lifetime income streams and the current higher-rate environment might be another reason to consider them as part of a retirement strategy. 

Withdraw at a higher rate  

Given the safety net of being close to receiving some part age pension, the couple in the case study may well decide that it is appropriate to draw from their assets at a higher rate than the 4.5% a year. A rate of 7% might be more appropriate, giving them $70,000 a year. This approach gives them significantly more retirement spending power and, as their assets reduce over time, they will start to receive some part age pension.   

As a 'safety net', if they get to the sweet spot with a level of assets that allow them access to the full age pension, they might reduce their portfolio withdrawal rate to preserve their remaining funds (around $400,000 in today's money if limits remain similar over time). 

Retire early 

With 67 being the age pension access age, we often refer to this as the 'retirement age'.  However, with access to superannuation from the age of 60 there is nothing to stop you from giving up work when you can afford to. 

Let's rewind the case study we have been using a few years, and assume that the couple are 60, working, and at a point where they have accumulated $750,000 in superannuation assets.  They might look ahead and decide that a retirement at age 67 based on having $400,000 of assets, the home they own, and a full age pension (total income around $62,000) looks great to them.   

That leaves the question - what to do now? They might decide that the extra $350,000 in superannuation can be used to fund an early retirement, perhaps starting at age 60, providing seven years of retirement funds at around $55,000 to $60,000 per year (when interest earned/investment earnings are taken into account). 

It might seem like a risk to be planning on spending nearly half your superannuation in the first seven years of retirement, particularly given the strategy relies on age pension rules that might change. However, the reward is a big one too - extra years of retirement. 

Make home improvements 

If there is something you want to do around the house that adds value then consider doing it. The value of a home is not included as part of the assets test.   

Adding a gazebo and greenhouse that provides pleasure while reducing some assets might be an effective use of funds. For example, a $100,000 project for the couple in the case study with $1 million in investment assets might give them about $300 a fortnight in age pension, plus the enjoyment the completed project gives them. 

However, it is worth avoiding the trap of a home project that is done solely to try to get the extra pension, which becomes something that is not used and even adds costs. For example, people who add a pool because they want to reduce their assessable assets often don't end up using the pool, while taking on the ongoing costs and time associated with maintaining it. 

Split super with your spouse

If a couple has one member who is younger, there may be benefits if having more superannuation assets in the younger partner's name. This is because superannuation assets only count as part of the asset test for the age pension once you get to age pension age. The older member of the couple may be eligible for a higher age pension payment for a period of time if more of the couple's assets are in the younger member's superannuation account.  

Superannuation contributions splitting, which allows someone to transfer superannuation contributions to their spouse, can be used to build the younger partner's superannuation account, as can making extra contributions directly to the younger member's fund. 

Give some assets away

Finally, gifting is another way to reduce assets. It's important to keep in mind that there are limits restricting how much you can gift before the value of the gifts may be included in the income and assets test for the age pension. The limit is $10,000 in any calendar year, or $30,000 over five years and is the same for singles and couples. 

Key takeaways 

The sweet spot, and then the 7.8% age pension penalty for assets beyond this point, are interesting elements in the retirement landscape.   

Some people with assets beyond the sweet spot will enjoy being self-funded retirees, and be happy with a retirement built around modest portfolio withdrawals. For others, the strategies outlined here are worth thinking about.