How to make your DIY super last longer

SMSF technical expert and columnist for The Australian newspaper
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Retirees appear to have a dilemma. This quandary involves how to ensure retirement savings can be spread out over as many years as possible without having to live in poverty.

Volatile financial markets make providing sufficient retirement income even more difficult, particularly when looking at a horizon of 30 years or more.
To help you live through your retirement years comfortably and with some increased financial security, here are some simple strategies that I’ve come up with that you may like to consider.

My first suggestion is conceptually simple: don’t retire too early. While this can be tempting, the less time you spend in retirement, the more time you have to build your retirement wealth. Likewise, the less time you spend in retirement, the less money you’ll need to fund a comfortable living.

I recognise, and sympathise, with those who want to work but struggle to get regular employment. And I also recognise that many retirees want to slow down, which is fair enough after many years in the workforce or raising their family.

My next suggestion is: think about a reverse mortgage. This is something that falls outside of running your self-managed super fund. However, many Australians have a lot of wealth locked away in their home and, at some point, it may be appropriate for you to unlock some of that wealth.

Most reverse mortgage providers will pay you a regular sum of money, much like a pension payment. When a reverse mortgage is structured like this you effectively turn your non-income paying family home into an income.

By combining your superannuation income stream with a reverse mortgage that provides a regular payment, you can reduce the level of income you receive from your super pension, and this helps to decrease the demands on your super assets.

Like any product involving debt, you need to be especially carefully with reverse mortgages.

For example, you might be interested in taking a lump sum reverse mortgage and depositing that into your super fund, turning it into a pension asset. Without going into specific detail, this strategy often doesn’t work because of the transaction expenses involved.

My next suggestion involves the government’s ‘aged pension’ and Centrelink’s assets test. The aged pension is often misunderstood, so here’s a brief explanation of how it works. If you and your spouse are both eligible for the aged pension and you own your home, then you’ll receive a part pension if your Centrelink assessable assets are between $265,000 and $998,000.

You receive the maximum aged pension if your assessable assets are less than $265,000.

Let’s suppose you and your spouse are both aged 65 and you have $750,000 in assessable assets. For every $1,000 increment below this asset value, the aged pension will increase by $1.50 per fortnight (or $39 per annum).

This may not sound like much of an increase, but it can have a remarkable impact. For example, if your assets fall by $100,000 to $650,000, then your aged pension would be an extra $150 per fortnight or $3,900 a year.

As the market value of your assets moves up and down, the aged pension helps to smooth the adjustment that must come about because of these market movements. This, and the supplementary benefits of the aged pension, are the real value of this government-provided benefit.

My second-last suggestion involves fees and charges. You must make sure you understand all your investment costs, especially the percentage asset fees. These fees can be a real drain on your retirement funds over the medium to longer term.

And my last suggestion involves deferring taking income for as long as possible. Let’s re-use the example above of you and your 65-year-old spouse with $750,000 in super assets.

If you want to take an income from this pension, based on your SMSF balance and the rules determining the minimum pension payment, you would have to make an annual payment of $37,500 from your SMSF. Suppose you don’t need all this income. Then I suggest you don’t move all your super assets over into the pension phase. The super laws allow you to keep all or part of your assets in the accumulation stage.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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