Money
Unlocking your future: Transitioning from saving to spending
After decades of growing your wealth, retirement is the time to shift your mindset from accumulation to decumulation; strategically using what you've built to fund the life you want now.
By Nicole Pedersen-McKinnon
We spend most of our adult lives with a bent towards – in fact, we may be hellbent on – accumulation.
Housing… furniture for that housing… cars… investments… super… such that, when it comes time to spend what we have painstakingly accumulated, it can cause surprising discomfort. Indeed, even psychological pain.
After decades of our super stash growing automatically, and sometimes paying scant attention to it, there is little preparedness for the fact that when you can finally get your mitts on your money, you need a bit of planning nouse.
You need to make active decisions about funding your retirement once you get there.
So let's start with the flipside-phase of superannuation, when you transfer your super to savings you can actually access.
Here’s what you need to know.
Switching super into pension phase
If you retire with a decent amount of superannuation, you'll have some decent options as to what to do with it.
Firstly, there are no restrictions on what you can withdraw as lump sums… once you reach age 60 and have retired, or hit 65.
Yes, you can joyfully withdraw chunks over time, but sadly that means your money could disappear quickly.
An alternative is to set up an allocated or account-based pension.
The beauty of this is that the earnings from the investments held in your fund will, at this stage, become tax-free.
But they’re not just tax-effective but flexible: you get to decide how much you’d like to be paid, and how often.
All you commit to is withdrawing a minimum amount that changes based on your age.
Hopefully your investments also continue to grow which may even mean your fund balance doesn’t fall.
The idea is to eke out your super savings so that they last as long as, well, you do.
More on this: 11 ways to make retirement income last as long as you do
Which, of course, they may not.
Your other main accumulation options to build up enough to fund your retirement include buying shares outside of super, perhaps dividend-paying ones, or investment properties, with the goal by retirement of having rent that is liveable profit.
But if you think you will have little income – or lump sum – alternatives besides these options, it might be time for a re-think.
Before we get into a possible solution, let’s take a quick look at why a gap exists.
The Australian housing vault problem…
Australians, due to incessantly rising property prices, now have an enormous proportion of their wealth tied up in their homes.
Indeed, equity held in family homes makes up half the net assets of households’ worth between $500,393 and $925,461, according to a Productivity Commission Report called Snapshot of Inequality in Australia.
For those with a net worth of up to $1,343,001, a slightly lower 48.78% of wealth is in the roof over people’s heads.
Only when you get to households richer than that do outside wealth percentages start to significantly climb.
Let’s talk about the vault you’re living in
So, for many Australians, the family home holds a huge chunk of their wealth, but that doesn’t help much with everyday expenses in retirement. So, how do you turn locked-up equity into flexible, tax-effective income?
The downsizer contribution
The relatively new ‘downsizer’ opportunity and incentive is in recognition of this and in an attempt to unlock housing stock for younger Australians.
Several years ago the government introduced the ability for each individual to contribute $300,000 of its sale proceeds into super, provided you have lived in your home for 10 years.
This doesn’t affect any of your other allowances and is from age 55 without an upper age limit – so it represents a rare opportunity to top up your super after 75. (And get your investments earning tax-free, once you swap them into pension phase.)
And a couple can contribute a full $600,000.
The appeal might be if you were looking to swap the high-maintenance, larger property for a no-stress, smaller one.
But the wrinkle financial advisors regularly report is that rarely do homeowners have much spare cash from this move anyway; they often prefer to purchase larger units with the sense of space they are used to.
We also know there is a huge nostalgic attachment to the family home. A survey of 10,000 Australians by the Royal Commission into Aged Care, Quality and Safety found 80% of older people want to stay where they live today. And 62% plan to receive care services in their own home, if and when they are required.
So, downsizing may not be the panacea to the property skew that people might think.
It's no surprise, then, that an industry has sprung up with solutions to make your home ‘pay while you stay’.
Yes, ideally, you'd have investments in super or otherwise that you can liquidate to live on, but you can also access the equity that is tied up in your home for your everyday expenses… without selling it.
The reverse mortgage
A product called a reverse mortgage has been operating as a reputable pension plank in the United States and United Kingdom for decades now.
A reverse mortgage is very much like what it says on the tin; it acts like a normal mortgage, except that you don't make any repayments during the loan term. The interest instead rolls up and is added to the loan balance.
Naturally, this means that the debt grows and because it's a debt on which there are no repayments and for which your lender doesn't know the end date, the interest rate is also more expensive than a regular loan.
However, if property prices go up apace, then you will maintain a decent margin of equity. Some Australians believe this to be important so there's some left to bequeath to their children (and we will get back to your consideration of your kids in a moment).
Generally, you are able to take out a reverse mortgage as young as age 55 provided you own a considerable stake in your home.
The longer you wait, the more money you will be able to borrow against it because – slightly macabrely – the loan will be taken for less time before you die.
Your debt is repaid from the sale of your house at that point, or should be able to be discharged if you decide to sell earlier. Always check.
Importantly, there is a no negative-equity guarantee (NNEG) on reverse mortgages. That means your debt cannot grow beyond the value of the property, as such, and you will never be forced to sell and lose your accommodation.
Home reversion schemes
Then there is a slightly different way to tap into your locked up cash: home reversion schemes.
Home reversion schemes are really a shared equity deal you do with a financial institution. In this case, you sign over – or sell – a percentage of your property for which you receive the current value of that percentage in cash.
Usually this is received as a lump sum but a regular income might also be available.
Of course, the company gets a proportion of the price achieved on your property’s sale. Or you may be able to buy the stake back… check again.
You can often take out a home reversion scheme only from age 65.
As a straight-up part-sale, here, your percentage chunk could always be protected… a factor, once more, if there’s a concern for cash for your heirs.
However, there is usually also an extra cost. In fact, with some products, a provider’s share of your property may increase over time, a little like a reverse mortgage.
Other products will instead pay you less initially than the prevailing market value for that proportion of your property – it’s just the price of the opportunity.
There are different rules and restrictions with different lenders of both reverse mortgages and home reversion schemes so make yourself fully aware of these upfront and perhaps see a solicitor too.
The government Home Equity Access Scheme
There is also a government, rather than commercial, option.
Called the Home Equity Access Scheme, it lets Australians who are age pension, age or older, take out a non-taxable loan from Services Australia.You need to be of Age Pension age (67 years), or receive a carer payment or disability support pension to access this one. You can read more about eligibility here.
It’s a fortnightly payment, based on your equity, meant to supplement your retirement income. And it’s capped at 150 percent of the full pension you could receive (you can get only the difference to bring you up to 150 percent if you are receiving any).
The upside of all the restrictions on this scheme is that the interest rate is only 3.95%, set at the discretion of the Minister for Social Services and subject to change.
Just like above, it’s up to you how much of your property you offer as security.
The Services Australia website also says: “You can choose a lower [loan] amount than the one we calculate. If you do this, your payments stop once your balance reaches that amount.”
And you can repay the loan early or from your estate.
Changing your mindset from ‘save’ to ‘spend’
There is a final factor when starting to think about spending instead of saving – particularly when it’s your house.
You will have spent decades saving and building wealth. But once you reach retirement, you need to shift your mindset from accumulation to decumulation… and it can be a tricky switch to flick.
Unlocking the equity in your home without downsizing is one powerful way to do this.
There are multiple options that allow you to access your housing ‘cash-stash’ to strategically fund the life you want now.
Accessing your home equity can free up cash while you stay in the home you love and give you flexibility to cover living costs, travel, or unexpected expenses like making your home appropriate for you as you age.
But reverse mortgage and home reversion providers report that paying off your home itself is one of the main reasons people take out products. They swap a monthly mortgage commitment for a commitment they don’t even have to honour while they are alive.
More on this: Why you SHOULDN'T pay off your mortgage before you retire
However, the other big reason that people access the pent-up property wealth they hold is to help their kids get a property in the first place.
With the Bank of Mum and Dad estimated to be Australia’s 9th largest lender, an enormous intergenerational wealth transfer is underway… as a so-called ‘living inheritance’.
Related: Accelerate your legacy: how to release intergenerational wealth sooner
Mozo research says the average gift is now $74,040 and is for a house deposit; 3-in-4 parents do not expect that money to be returned.
Just be aware that there could be age pension implications for any of it: downsizing, a reverse mortgage, home reversion scheme and gifting any money. Gifted money above $10,000 a year and $30,000 over 5 years counts towards the assets and income tests for eligibility, under the deprivation of assets rules.
The key to a successful spending phase of life is careful planning: understand your future needs and get independent advice.
But the bottom line is: why, if you don’t need to, would you compromise your quality of life when it counts?
Feature image: iStock/RgStudio
This article reflects the views and experience of the author and not necessarily the views of Citro. It contains general information only and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their personal circumstances before making any financial decisions.
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