Letter: Tell me about 'the sweet spot'
This week I explain the sweet spot - the point where people with less superannuation can actually end up earning more retirement income than self funded retirees.
In this edition
Feature article: Letter - Tell me about 'the sweet spot'
Prime Time: We’re all going to live a lot longer, and that changes everything with Dr Andrew J. Scott
From Bec’s Desk
This week let’s focus on one really cool letter I received from Janet. It’s a doozy!
Hi Bec, I enjoy your column and podcast - lots of useful stuff.
I am scaling down to retirement - currently working part time - and am 62.
I had dismissed the chance that I would qualify for even a part pension in due course (at least until some of my super is spent) but I hear about 'the sweet spot'.
This seems to imply that for those of us just over the pension threshold there are options to better arrange our affairs. But is this really the case and is it worth it? I don't want to spend money just for the sake of it to qualify for not a lot...
Help - please explain the theory here.
Janet
Hi Janet, as you know I can’t give you personal advice, but I can present you with the facts on ‘the sweet spot’ and point you to where you can get more free information before you pay for professional advice if you feel you’re ready. So let’s dive in…
Where is the sweet spot between the age pension and superannuation drawdowns?
This week, let’s delve into a pressing topic that many approaching retirement ask me about: the elusive "sweet spot" between the age pension and superannuation drawdowns.
Everyone with an average superannuation balance in Australia could benefit from learning about how our superannuation and age pension systems work together to create a real sweet spot.
The sweet spot represents the tipping point where people with moderate superannuation balances, and eligibility for the age pension can potentially earn more annual retirement income than those who are fully self-funded with a much larger super balance. To understand it you need a comprehensive understanding of the Australian retirement system, and how you use the age pension and superannuation together most effectively.
To understand what the sweet spot is, you need to learn about a couple of key things:
You need to understand how the eligibility for the age pension works, and how you’ll perform on both the assets test and the income test.
If the assets test is the one that is biting you, then the sweet spot discussion is an important one to learn more about. I cover both tests in the book.
You then need to understand what the taper rate is, and how it impacts age pension payments.
The taper rate is the rate that the age pension is tapered for people who trigger the full pension assets test threshold. In basic terms, when you trigger the assets test cap, which is currently $301,750 in personal and investment assets for singles and $450,500 for couples, the fortnightly full age pension rate is ‘tapered’ by $3 for every additional $1000 in personal and financial assets beyond the threshold. (Remember your family home is exempt from the assets test.)
Then, you need to work out how you might be affected.
The current full pension rates as at April 2024 are $43,752.80 for couples, including supplements, and $29,023.80 for single people. So that’s the baseline you’re reducing from.
A person or couple on the cusp of the full pension assets test cap, where the taper rate kicks in, will effectively lose $78 per year (26 weeks * $3) in aged pension for every $1000 in personal and financial assets they have over the thresholds.
A person or couple who are ineligible for the age pension would need to earn approximately 7.8% in income from their funds to achieve the same financial outcome as someone receiving the full pension, considering the tapering effect between the part-pension's limits.
People who are marginally over the assets test threshold and do not trigger the income test because their core incomes come from their superannuation or other ‘financial assets’ that are deemed, may see benefit in planning around these assets test windows.
Let’s do some sums together to show you how it works.
Maya and Sunil, both 67 years old, have combined assets of $451,500 in superannuation and own their family home outright worth over $1M dollars. They are drawing down only the mandatory 5 per cent superannuation drawdown rate, which amounts to $22,575 income from super. (Remember that the income test handles superannuation as a deemed asset not actual income).
Additionally, because they are at the threshold, they would be able to receive a total of $43,752.80 from the age pension, including supplements. In this scenario, their combined annual retirement income stands at $66,327.80, closely aligning with the amount deemed comfortable for retirement which is now $72,148. They could also afford to earn an additional $11,800 from working without affecting their pension income at all. If they earn more from work, they’ll need to pay greater attention to the income test thresholds too.
In contrast, Melanie and Will, who are 67, have a home worth $1.5M that they own outright, $1.2M in their joint superannuation fund, and are ineligible for the age pension. They too are drawing the standard 5 per cent drawdown rate, and, if they do this, their superannuation drawdown is $60,000. They can work, pay tax and put money into superannuation by the standard rules, as they don’t have to worry about triggering an age pension cap. They can also choose to draw down more from their fund.
There’s a much bigger debate to be had here about the returns you can get from money if you are a partially self-managed retiree accessing a part age pension. Effectively, you would need to be getting a return of more than 7.8% on your funds over the pension thresholds to be outstripping the benefits of minimising your balance to these levels. Boggling when you really think about it.
It's crucial to carefully consider investment returns and pension thresholds before making decisions about retirement finances. And you really do have to think about it. I don’t think people should make the decision to ‘burn down’ their financial assets lightly to access more pension income. And I do think that getting advice, if you are on the cusp is really important.
Where can you get advice?
If your money is in one of the major superannuation funds, my first suggestion is to use their online calculators and tap into the free advice they offer you as a part of your annual member fees. Most have ‘superannuation financial advisers’ and/or ‘retirement advice’ that can help you make informed decisions tailored to your own financial circumstances. This advice is usually free, as I said. Some might charge you a nominal amount.
The other thing to know is that independent financial advisers who specialise in retirement advice, are usually expert at this stuff. As Janet pointed out, getting personal financial advice could be expensive, but if you are on the cusp, the advice and support in making decisions about saving versus spending your superannuation more quickly are important to make very carefully.
I recognise that people who are planning to be entirely self-funded might feel annoyed by this sweet spot, but the extra flexibility to draw down more in the early more active phases of retirement may mean they could also end up in the sweet spot over time. I’m of the view that if the systemic capability is there, people may as well learn more about it. Then, they have the power to seek more advice on their own situation and make educated choices.
People who can’t get the pension at all may also benefit from exploring their eligibility for the Commonwealth Seniors Health Card, which relies on the income test only and has very high caps.
Love this? Forward it to a friend and suggest they sign up!
We’re all going to live a lot longer, and that changes everything with Dr Andrew J. Scott
“We have an opportunity to improve our lives significantly, simply by recognising that longevity is not about older people, it’s about how we adapt to living longer lives.”
Our life expectancies are growing, and it's likely we'll all live much longer. This means we need to make changes to the way we live long before we reach old age so we can enjoy a better quality of life.
This week, I had a chat with Dr. Andrew J. Scott, one of the world’s foremost authorities on longevity and the author of The 100-Year Life. He's just released a new book, The Longevity Imperative, which will be hitting Australian bookstores on April 23rd.
He is a professor of economics at London Business School and he has previously taught at both Oxford and Harvard Universities. And his perspective on longevity is simple, logical and sensible.
“We have an opportunity to improve our lives significantly, simply by recognising that longevity is not about older people, it’s about how we adapt to living longer lives,” he said.
I really enjoyed this conversation, weaving our way through all the impacts of longer lives, and hearing his very esteemed opinions on what we should do to make the most of them.
Listen now
LISTEN HERE - LATEST EDITION (E20)
Visit the show on APPLE PODCASTS
It’s Tuesday of the last week of the How to Have an Epic Retirement six week flagship course, and it has been truly a joy to run and host. Last week we enoyed a Live Q&A with the amazing Jim Kilkenny who many of you will have heard in the book, and on my podcast talking about relevance deprivation. We also hosted a live coaching session which absolutely blew me away! Our course attendee community openly talked about their feelings about their sense of purpose, and together walked through what they were doing as individuals to tackle it, with honesty and curiosity. I provided the framework and the facilitation, but they were the total focal point, each taking turns to put up their hands and talk on camera. We’re going to do more of these sessions in our next program.
I know I’ve been promising the launch of the next online course program for a few weeks, but we’ve been making some improvements, so I have to wait until I know they are ready.
Last week we filmed our updates, and the video-editors are hard at work on new lessons to go into the program in time for our next release. And, my amazing publisher has agreed with some excitement to create a high quality workbook exclusively to accompany the program! Yippee! So my nose is down, working on this beautiful addition. So the next dates will depend on the editors, typesetters and when it can arrive. They promise it will be fast. I should have dates by next week. The experts are all ready-to-go too!
You can register your interest here. There will be limits on earlybird spots next time so I recommend getting in fast. But we will be able to accomodate a much larger number of attendees as this is not a pilot anymore!
In other things, I’ve spent a lot of the week on radio stations and recording podcasts! So - much - fun! You might have heard me on ABC stations in Queensland, Tasmania, NSW and Victoria talking about how the age people are actually retiring at is rising, and the reality that some people really want to work longer, with balance in their lives of course.
This week we have a doozy of a Prime Time podcast coming out. Make sure you’ve set yourself to subscribe and download Prime Time in your podcast player so you get it when it drops. And thanks to Aware Super for becoming our super sponsor from last week!
And, I’ve been preparing some guest speeches for the weeks ahead. I’ll be heading to Melbourne, Sydney and Brisbane for a few corporate and superfund events in May and June. I love the guest speaking and educating in person part of my work. It offers a direct contrast to sitting behind this computer educating in writing that gives the perfect balance. Want me to speak somewhere? Email me.
And don’t forget to send me your letters! I love them. Please, send them to bec@epicretirement.com.au.
Many thanks! Bec Wilson
Author, podcast host, columnist, retirement educator, and guest speaker