I'm worried about my retirement investments
STEP 4: Strategies for the future
So you’ve reviewed your financial needs and goals and you’ve had a close look at your current investments. What can you do if there is a shortfall between the amount of money you need to live on and the amount you have available from investments and other sources?
Consider income support
Be sure to check your entitlements with Centrelink 
and Veterans Affairs . As a result of the drop in investment markets, many more retirees now qualify for a part Age Pension (under the income and assets tests).
The single Age Pension was recently increased by up to $32.49 per week and a range of other initiatives has been announced to assist retirees. From 20 September 2009 the Seniors Supplement will be made available to 300,000 self-funded retirees who are eligible for the Commonwealth Seniors Health Card or the Department of Veterans Affairs Gold Card.
The Seniors Supplement will be $790 a year for singles and $1190.80 a year for couples, paid quarterly. This is equivalent to the minimum rate of Pension Supplement received by part pensioners.
Eligible seniors will continue to be eligible for other concessions linked to the Commonwealth Seniors Health Card such as: reduced prescription medicine prices, discounted Medicare safety net threshold and concessional rail travel.
- Check if you are eligible for the Age Pension or call Centrelink Retirement Services on 13 23 00.
Cut back your spending
You may realistically have to make some tough decisions about your lifestyle. A common trap for retirees is to underestimate how much money you are going to need to live on. And it is important to ensure you do those calculations based on your life expectancy and based on a conservative rate of return (say 2% on your investments). If it looks like you will run out of money prematurely, your only options are to generate more money, or cut back on how much you spend.
Start by looking at your expenditure before looking for other sources of income or capital. Use the budget planner to see which expenses are essentials and identify non-essential items you may be able to cut back on.
Make use of cash reserves
Your nest egg may not be that healthy but you should make sure you don’t overlook savings accounts and other sources of ‘rainy day’ money before you consider selling longer term investments.
Stay diversified
Most retirement income streams and other investments provide a range of investment options. These are set out in their Product Disclosure Statement. If you’ve been in a ‘high-growth’ strategy you’re more likely to feel the impact of fluctuations in share and property markets. This may lead you to think that you should be shifting your money into a ‘safer’ investment option, such as cash or fixed interest.
Any decision to switch investment options should be based on your age and when you will need to withdraw the money to spend it. Finding the right investment strategy shouldn’t be a knee-jerk response to short-term market fluctuations that have resulted in a short-term dip in the value of your investments.
Provided you still have enough capital left to pay an income stream for your life expectancy, you should be able to ride out the current downturn.
However, if the capital value of the income stream has fallen you may find yourself in the position where you have to draw down a percentage that is higher than the required minimum to have enough income to live on. Attempt to look at all the assets and sources of income you have available before making such a decision.
| TIP: | Reduce your superannuation pension payments. Cut the amount you take from your allocated pension payments each month and use bank account reserves to tie you over. This will help you to stretch the capital value of your income stream until the market picks up. |
Should you sell investments?
Selling your investments at the bottom of the market should be avoided if at all possible. If a financial planner recommends this, ask:
- How will it affect what my assets are worth in 5 or 10 years time?
- How does the 10 year past performance of the new investment compare with my current portfolio?
- What fees and charges will apply?
Ask the planner to provide their answers in writing in a statement of advice.
Remember that selling investments when the price is low may mean that you're unable to make up lost ground when markets recover.
| TIP: | Draw from your least volatile portfolios. If you have your investments diversified you should have at least three years income allocated to a conservative portfolio and that’s where you should be drawing from. |
Go back to work?
Once you’ve reached retirement age you are entitled to go back to work without jeopardising the tax-free status of your superannuation benefits. However, there are age-based restrictions on how much you can contribute to super as a way to re-grow your capital base and you can’t turn off an allocated pension or annuity if you do decide to return to work.
Once you turn 65 you must work 40 hours over 30 consecutive days in a financial year in order to continue making contributions to super.
From age 70 to 74 you can no longer make spouse contributions or take advantage of government co-contributions. From 75 you can’t make your own contributions and are only entitled to employer mandated contributions (the ‘super guarantee’) if the employer chooses to pay.
A decision to continue in the workforce for longer than anticipated will also depend on your health, desire to continue working and whether you can find a job or not.
Sell the family home?
Sometimes, selling your home and downsizing into smaller accommodation is a valid way to release some of the wealth you’ve accumulated over the years.
The most tried and tested method used for freeing up that wealth is downsizing. This involves putting your current home on the market, taking the tax-free capital gain, buying a new, smaller and cheaper home and using any excess money to invest in order to generate further retirement income.
Part of your planning process should be to think carefully about what type of alternative accommodation you’re looking for. Do you have a particular location in mind? Do you want to stay close to family and established social networks or escape all that completely? Do you have a style of accommodation in mind and particular facilities that you find appealing?
If you do decide to downsize or purchase a new home as part of your retirement plans, you will need an up-to-date appraisal of your home’s market value to ensure your expectations are in line with present market conditions. This will give you an accurate idea of how much capital you will have available to pay for your next home.
Remember that all prices are relative. Your home’s value may have fallen slightly over the past 12 months. However, the prices of properties you will be considering for purchase may also have fallen slightly, in line with current market conditions.
Should you take out a reverse mortgage?
Another option is to stay in your home and take out a reverse mortgage where the lender gives you cash now in exchange for payment when you sell it, move out or die.
However, reverse mortgages and similar equity release products have complex conditions and come with significant risks. Before entering into such an agreement, download a copy of Thinking of Using the Equity in Your Home? or phone ASIC’s Infoline on 1300 300 630 for a copy.
You can also call NICRI’s free reverse mortgage information service on 1800 615 676.
Should you chase high returns?
Be wary of chasing investments with higher returns. Remember that high returns generally come with much higher investment risk. In addition to scams offering early access to your super, there are other investment offers that you should think carefully about:
TIP: FIDO has more information about investments to watch out for.
FIDO Website: Printed 07/31/2010
