Unexpected retirement, unexpected problems and unexpected solutions—Part 2
This is the second of a two-part series about unexpected or forced retirement that may come from ill health, an accident, retrenchment, caregiving demands or a number of other circumstances.
Plans built around an unexpected retirement are different. There’s an urgency that confronts people when their circumstances change without warning. The natural tendency is to make decisions quickly. Instead of thinking about the next 10 years, it’s wise to plan in terms of a series of phases over a longer period of time.
The first phase may be defined in terms of eligibility for the Age Pension, or access to your superannuation (and, if applicable, access to your partner’s superannuation). Phase one may involve five or more years when the primary source of income may come from investments, a Transition to Retirement pension and drawing down on accumulated savings.
There may also be an opportunity to downsize your home or consider a tree- or sea-change move to the country.
The second phase commences when you have access to your superannuation and, perhaps, a part or full Age Pension. This phase may also involve travel plans, and should include a contingency plan for the replacement of white goods and perhaps a change of motor vehicle(s).
Many retirees currently generate an income combining some of the Age Pension, tax-free income from their superannuation (Allocated Pension or Annuity) and some investment income. This can result in paying no income tax because of the Senior Australian Tax Offset.
The third phase commences when Aged Care support becomes necessary.
Here are six steps that are worth considering as you look at your finances in any retirement, but especially an unexpected one.
1. Adjust your spending
Take a good look at ways you can reduce your regular outgoings. Maybe you can exist with only one car or, in some cases, without a car. City residents may be able to access car sharing or car rental services that operate in inner-city areas. Some may be able to access discounted taxi services if they’re frail or disabled.
Costs may also be reduced by making your home energy-efficient and by being smart with window shades, solar power and reducing the use of water.
2. Consider downsizing or a lifestyle move
Downsizing to a smaller dwelling has some appeal provided you can make the move and release some capital for investment. In many inner city areas it costs a lot to downsize because smaller dwellings are in short supply. Smaller, well-located dwellings may also be expensive. It pays to do the numbers (and allow for the costs of selling, Stamp Duty and legal fees).
A lifestyle-move to the country or the seaside appeals to many people, but it isn’t without its problems. In many cases such a move is like going down a one-way street because there is no way back.
Inflation in capital cities is traditionally stronger than most other locations and over several years relocating back to the previous suburb may be impossible because property prices have risen, doubled even.
3. Sell down investments over several tax years
Timing when to sell investments requires commercial judgement and an eye on tax consequences. Shares and managed investments can be sold in ‘parcels’ as distinct from selling everything at once.
Selling investments will in most cases create a Capital Gains Tax (CGT) impact. CGT profits are treated in a different way to ordinary investment income. Only 50% of any realised CGT gains are assessable and therefore it pays to sell investments in years when other taxable income is reduced.
4. Investigate the role of a Lifetime Annuity
Lifetime Annuities are a form of income stream investment that lasts for life. They can be purchased with either superannuation money or money from savings. Life insurance companies that offer this type of investment guarantee that the income will last until the investor dies.
There are a number of other features that might apply such as indexation of the annual income, access to capital lump sums and reversionary pension options. A reversionary pension means that a partner or spouse can take over the income and be paid until they also pass away.
5. Looking for part- or full-time work
If you’re willing and able to work, there are several websites that advertise employment opportunities for mature-age workers. Some local councils promote networking groups that could be useful if you’re looking for work.
However, it’s often a case of not what you know, but who you know when it comes to unearthing part- or full-time employment. Never underestimate the value of friends and family when it comes to looking for a position.
6. Home-based business ventures
A growing number of mature-age people are operating a small, home-based business without risking their retirement savings. It’s vitally important that you get good advice before going down this path.
The internet allows business operators numerous ways of attracting sales and getting paid before any goods change hands. The two critical issues for any business have always been how to make a sale and how to get paid. The internet now makes this easy if you have a credible business plan.
Get good advice and get it early. That’s important. And be wary of the dream stealers who tell you that some things will not work. Network with your good contacts, and be prepared to keep on learning.
Owen Weeks is director and authorised representative of Lifestyle Matters Pty Ltd and a Registered Tax Agent. He is a Fellow of the Financial Planning Association, a Fellow of the Institute of Professional Accountants, and an Honorary Fellow of the Association of Superannuation Funds of Australia. He is also the co-author of Retire Bizzi and Where to Retire in Australia.