Retirees face the Centrelink visit they had saved to avoid

The embarrassment of walking into Centrelink to apply for the age pension is not something that appeals to him but if the sharemarket does not improve he may not have a choice.

"If it is a financial necessity, I guess you have to do it."

Like many self-funded retirees approaching retirement or already living off the savings which they carefully put away year after year, this man watched as his nest egg was smashed apart by financial markets more than a year ago.

His fund dropped from $720,000 at the top of the market to $420,000 by October 2008.

He prefers to remain anonymous when publicly discussing his financial loss, as other Australians whose pride has been damaged by the disappearance of their savings can understand.

"We went through the dotcom bust in 2001 but that recovered fairly quickly," he says.

"This is a far deeper crisis and far more serious crisis."

The gentleman in question had 30 per cent of his portfolio invested in property trusts, most of which were heavily geared companies that suffered severe losses during the credit crisis. Shaken by the crash, he has now put 60 per cent of his money into term deposits, which earn a steady and guaranteed income. Forty per cent is still in shares, which can have higher returns or disappear completely, depending on how the market performs. Any dividends earned on shares will be reinvested.

While this gentleman is not yet applying for the pension, he says there are many self-funded retirees who have found they cannot live off the returns from investments as they used to do.

Not only is the sharemarket still damaged by the crisis, currently 33 per cent below the 2007 peak, but dividends are lower than they have been for many years. A dividend is the amount of money each shareholders receives as a proportion of company profits.

But the chief investment officer for the private wealth advisers Evans & Partners, Mike Hawkins, is optimistic about a recovery in dividends.

"If you look at calendar 2010 and what we know from the reporting season to date, I think there is a recovery coming through," he says. "But the bounce in profitability is outpacing the bounce in dividends, so companies are still being pretty conservative and holding down payout ratios."

A payout ratio is the amount of a company's cash earnings passed onto shareholders through dividends. A low ratio means the company is retaining earnings rather than passing them on.

Investors with their money in the right places should see their dividend income return to pre-crisis levels by the middle of next year, Hawkins estimates.

Brokers have been surprised by the number of companies that recently announced increases in dividends from their profit for the accounting period July 1, 2009, to December 31, 2009.

Goldman Sachs JBWere estimates 45 per cent of companies had higher dividends compared with the same period in 2008.

On the other hand, the financial crisis has forced businesses to change the way they operate, and this could have a permanent effect on dividends, says the chief investment officer at Lachlan Partners, Paul Saliba.

"While we are seeing some companies increasing dividends, they are remaining fairly subdued when compared to what was being paid prior to the crisis," he says.

"Presumably companies are trying to retain capital for [capital expenditure] or acquisitions, as well as having that extra buffer following the difficulties faced in the GFC."

He says the overall yield from shares has fallen to about 4 per cent, compared with a 20-year high of nearly 7 per cent in late 2008.

"Certainly those who have come to rely on the dividend [for income] over 2006 and 2007 will find it difficult," he says.

Self-funded retirees who were not "high-net-wealth individuals", to use a financial industry phrase, but had saved just enough money to live off dividends may be forced to consider returning to work or adopting a cheaper lifestyle.

But the living standards of many beyond working age will be dictated by how much profit companies decide to share with their owners.