Retirement Planning

How to Manage Money in Retirement

Australian over 50 looking up their super account balance.

The information in this article is general in nature. Before making any decision about your finances, seek professional and legal advice.

As long as you have a job and there’s cash coming in, managing money can seem quite simple. Just make sure there’s food on the table and monthly bills like car payments and mortgage are paid, put away a little in savings for a holiday perhaps, and some aside for the less frequent bills like council rates, insurance, and car rego… easy.

If you’re more serious about money, you might think about investing – play the stock market a little, or buy some bonds, maybe even purchase an investment property.

And if the cash at hand runs out before the next payday, well… there’s next payday.

Until you retire.

Your days are now your own but suddenly there’s no regular salary dropping into your bank account. But all those bills and necessities such as food and shelter are still there.

Now it’s not about managing money – it’s about managing three things:

  • your pension
  • your superannuation, and
  • your savings, including your investments.

In the following article, we’ll outline three ways to address these topics that may help you avoid turning a triple treat into a trio of tribulations.

Quick Links

    1. How to manage your pension in retirement 
    2. How to manage your super in retirement
    3. How to management your savings in retirement
    4. 4 money management tips

 

How to manage your pension in retirement

Just to be perfectly clear, the Age Pension doesn’t necessarily equate with retirement.

Most people are looking to retire sometime between 60 and 65-years-old. But if you get your wish and finish work at, say, 60, there’s another seven years to go before you can start collecting the Australian Age Pension.

If you have memories of your parents or grandparents starting the age pension at 65, that’s because the pension age was 65 from 1909 until 2017 when eligibility started being increased in stages from 65 to 67 years. Since July 2023, you can only access the age pension if you were born on or after 1 January 1957.

Even then there are eligibility criteria that could affect the amount you receive. These cover:

  • residence
  • income, and
  • assets.

Australian Age Pension eligibility criteria

So, you were born on New Year’s Day in 1957? Congratulations, Capricorn – you can apply for the age pension. But first, three questions.

Have you been an Australian resident for at least 10 years?

You need to be, and you also need to have been living here for an unbroken period of five years during that overall period, but there are exceptions to this.

What’s your income?

There’s an income test that assesses your income (and your partner’s income) from all financial assets such as savings, superannuation, and shares. It also takes into account if your partner works, and if you do any form of work.

The results of the income test could lead to a reduced pension. If it doesn’t, but your circumstances change down the track, such as you or your partner doing some paid work, you’ll need to report this income.

Do you own any assets?

An assets test is conducted as well and can also result in a reduction in your Age Pension.

Up for review are things including, financial investments, your home’s contents and your personal belongings, any vehicles that you own, real estate, your managed investments, and shares to name a few. What is assessed is the value of these things if you should sell them.

Once again, if your circumstances change, you’ll need to declare it. For instance, if your elderly uncle passes away and leaves you his $20,000 Rolex wristwatch you always admired, it becomes your assessable asset. No use giving it to your son or daughter either – gifts are subject to the assets test as well.

It’s complicated, but there are exceptions and relaxations on things, so – as always – get professional advice if you need to.

Meanwhile, there are strategies you can adopt to maximise age pension payments.

Downsizing from a large family home you no longer need (or are fed up with maintaining) offers a chance to reduce overheads and tip up to $300,000 for a single person or $600,000 for couples into your superannuation.

While we’re on the subject of super, mind if we ask a personal question?

How old are you, and how old is your spouse? If you’re pension age, but your spouse isn’t, you can use a provision called ‘bringing forward’ to contribute up to $360,000 into your younger spouse’s super account, and it’ll be quarantined from assessment until they reach pension age. In the meantime, you’ve increased your age pension amount.

Another strategy is to make sure your asset valuations are up to date. For instance, a car doesn’t usually increase in value. So let Centrelink know the value of your vehicle as it decreases year by year.

But while you’re rearranging assets to increase your age pension incrementally, don’t lose sight of the big picture – or the sentimental value of your late uncle’s Rolex! Sometimes we can be, as the saying goes, ‘penny wise and pound foolish’.

Age pension expert Regan Welburn reminds us to ‘remember that $10,000 is always worth more than $780’.

“I’ve come across many clients who are hyper focused on maximising their pension entitlements to the detriment of their overall financial position,” she says.

How to manage your super in retirement

Amassing your superannuation takes you a working lifetime. After all that, you’ll probably agree it’s best to take care not to blow it when you hit that magic preservation age.

Preservation age is:

  • 60 years for people born on or after 1 July 1964 who have retired completely from work, or wish to start a transition to retirement and have met the conditions for that, or
  • 65 years if you are still working.

There are then usually three options for withdrawing your super:

  1. Take it as a lump sum
  2. Start a super income stream
  3. Start a combination of the above two options

But here’s where it gets tricky because your choice of withdrawal option can affect the tax you pay, including taxes on investment earnings you have.

It’s worth mentioning also that a lump sum isn’t necessarily ‘the lot’. If your super fund permits it, you can withdraw a series of lump sums. But if you’re looking for regular payments, paid at least once a year, that’s an income stream.

Income stream vs lump sum – what’s best?

The lump sum has advantages. It can be used to purchase a home, for instance, or a big-ticket wish list item such as a caravan to do the Big Lap. You might choose alternatively to get an investment property, or a passive income business.

The downside is that, once withdrawn, the cash isn’t superannuation anymore. Holding onto it makes it taxable savings, and investing it successfully leads to potentially taxable earnings.

And let’s not forget that investing it unsuccessfully could be disastrous for your dreams of a comfortable retirement.

The fact is that only around 16 percent of people opt for a lump sum payment from their super. It’s the least popular choice, and frequently the option of those who haven’t actually amassed very much superannuation at all.

Much more popular is the income stream, also called a pension or annuity.

They take several forms, the most popular being an account-based stream. This provides you a steady income once you retire, and your fund continues to invest the money remaining in your super account

But, depending on your particular super fund, it may not have to be a fixed regular amount, or even regular in terms of intervals. What’s required by the Australian Tax Office, however, is withdrawal of a minimum amount each year.

And if you decide to halt your income stream, there may be further income tax implications.

Your super and tax

Tax changes that came in at the start of July 2024 include good news for Pay As You Go employees.

Your employer will now contribute more towards your super at 11.5 percent.

Meanwhile, the limits on how much extra you can voluntarily add to the low tax environment of your super savings have been increased too.

Couple this with the ‘Stage 3’ tax cuts introduced at the same time and things are looking good right now if you’re setting to retire or transition to retirement in the next few years.

But of course, tax is one of the certainties of life, and your super doesn’t escape unscathed. It can get taxed three times in its existence:

  • When you make contributions
  • When you take money out, and
  • When your super fund’s investments make a profit.

On that last point, it’s good to know that retirement phase investment gains are tax-free.

However, investment gains while you’re still working face a 15 percent tax, and how much withdrawals are taxed during retirement depends on whether you have chosen a lump sum or a super income stream.

These include arranging a salary sacrifice if you’re an employee or making personal deductible contributions if you’re self-employed.

There is also a super tax offset available if you earn under $37,000 a year, and a personal tax offset for making limited contributions to a spouse’s superannuation.

Happy couple going over their finances

How to manage your savings in retirement

Another area in which it’s best to get started before retirement is savings. Not just putting together an emergency fund for unexpected expenses, but also – quite separately – saving as a long-term strategy for the future.

It’s beneficial to get an idea of what your expenses will be in retirement. They may be different to what they are now, so it’s a good idea to think about what you want your retirement years to look like, the things you want to do, places you want to see, and where you want to live.

The first thing to do is review your outgoings against your income now.

Make a list of what you pay for:

  • The roof over your head (mortgage or rent, insurances, rates, upkeep)
  • The utilities connected to it (water, gas, electricity, phone, internet)
  • The furniture and appliances inside it
  • The food on the table (including takeaway or dining out), and the clothes on your back
  • Your health needs and leisure activities
  • Your transport costs

When you’ve got all this down, MoneySmart has a good online budget planner that you can plug your figures into. You can be as detailed as you want – very detailed is best! At the end of the process, you’ll be able to see if your budget is in surplus or not, alongside an annual spending breakdown.

A good feature of this planner is the ability to adjust figures for savings (as well as other entry items), and immediately see how much more or less you’ll be saving over time.

And remember that savings don’t have to be just cash in the bank. In fact, just holding growing amounts of money in a low or no interest-bearing account is a waste unless you foresee a need to draw on those funds quickly –  and frankly that’s what an emergency fund is for.

Keep your everyday expenses account for exactly that, keep your emergency fund ‘quarantined’, and make better use of your larger cash savings with investment products such as term deposits, stocks, or bonds, for instance.

The good thing about planning a budget for daily life before you retire is that reviewing the different items can help you decide if there are inclusions you could easily give up immediately to tip those costs into savings.

It also lets you cast an eye over outgoings and costs to consider if there might be things you won’t really need when you do retire such as you and your spouse both owning cars, for instance.

The MoneySmart planner is useful in that it can save your budget plan, so you can return to it to track your expenses and adjust your budget over time.

The Bucket Strategy

There was an old man from Nantucket
Who kept all his cash in a bucket
His daughter – named Nan –
Ran off with a man
And, as for the bucket, Nan took it…

Now we’ve got the old children’s limerick out of the way, let’s talk about when it does make sense to keep your cash in a bucket, or, rather, three of them – but not literally, of course.

The bucket strategy is a method to manage money by dividing income into three ‘buckets’.

Bucket one contains cash for things you need in the short term – your day-to-day expenses. Bucket two contains relatively safe investments such as reliable dividend paying stocks. And bucket three includes shares and property.

This is useful in retirement because while bucket one pays the bills, conservative bucket two looks ahead from day one of retirement to the next three to seven years, and higher risk bucket three looks even further down the road, evening out the ups and downs of the market over time.

It needs a good amount of savings and super to begin with, however, and because it needs regular review and adjustment, the bucket strategy isn’t for everyone.

It’s important to fine tune it and know what you’re doing to manage withdrawals and investments.

You don’t have to manage it entirely yourself, but being financially savvy and having a good financial planner to help will go a long way to success.

Four Extra Money Management Tips

Putting coins into a piggy bank

1. Eliminate your debt before you retire

The Association of Superannuation Funds of Australia estimates that a couple who own their own home and find themselves in good health at 65 will need nearly $62,000 a year to sustain a comfortable lifestyle in retirement.

But even if your finances can sustain that, you’ll be stymied if you’re carrying debt into your post-work years as well.

When planning for retirement it’s vital to prioritise debt repayments.

If you owe money on a car, a phone contract, credit cards, or personal loans – anything – the payments and interest are going to be a drag on your ability to have that comfortable retirement. It’s no exaggeration to say if you carry enough debt, it might even lead to you running out of money and having to rely solely on the Age Pension.

If you have two or more debts to pay each month, it can be hard spreading your financial resources across them all.

There are two similar but strategically different ways to handle this – the avalanche method, which prioritises interest rates, and the snowball method, which focuses on how much you owe on each debt.

In both cases, you’re launching an all-out attack on one debt at a time while allowing the other debts only the minimum payment required each month.

In the Avalanche, you:

  1. Find out what the interest rates are on each of your debts
  2. Concentrate your resources on paying off the debt with the highest interest rate first, regardless of the amount you owe, and
  3. Pay it off as soon as possible, then move on to the next one down.

In the Snowball, you:

  1. Pay off the debt on which you owe the least, regardless of its interest rate
  2. Move on to the next one up the line and repeat until they’re all gone.

The snowball method can be the most satisfying if you need the encouragement of seeing your debts defeated quickly. A small debt paid off before its time is a great motivator to do the same to the bigger ones.

An extra advantage of both is that, with each debt that falls, you can add what you were paying on that to taking down the next one.

But – and this is a big one –avoid taking on new debt to replace the ones you killed off. You’ll be kicking yourself if you do.

Think of your comfortable retirement, make a budget, and avoid unnecessary spending.

2. Get on top of your investment portfolio

Diversification is a strategy that lowers your investment portfolio’s risk factors. It mitigates against events such as an individual investment failing or the share market, for instance, falling.

By investing your money across different asset classes, you can achieve more stable returns and won’t lose all your money on one spectacular investment crashing.

If you’re knowledgeable and into the work involved, you can do it yourself, but it’s demanding and time consuming. Best in any case to get professional advice.

The amount of risk you take, however, can vary over time.

Close to retirement or having just started it? It’s best to play safe with your portfolio.

If you have years to go before giving up work, a higher percentage of riskier investments in the mix can pay off if you or your financial advisor know when to get off the ride.

As noted earlier, a degree of riskier investment can even be part of the bucket strategy in the earlier years of retirement.

And don’t forget that dividend income from bonds, interest from fixed-income investments, and rental income from real estate are just some of the other ways to earn a passive income.

3. Kill your credit card

Personal finance coach Jade Warshaw often asks people ‘are you a credit card person’? By this she’s asking are you capable of paying off your entire credit card balance each month.

If not, debt –and interest (on average 18.34 percent per annum in Australia) – accumulates.

And with nearly 70 percent of us Australians having a credit card, and 20 percent having two or more, that’s a lot of debt and interest accruing in our lives.

The solution is to pay off your credit card as soon as you can. Then use only a debit card attached to an account with a set budgeted amount in it at the start of each week or month. You’ll be using your money, not the bank’s, and there’s no interest to pay.

If you have two cards, there can be advantages to a consolidation of accounts as long as there is an interest-free period on the consolidated amount, you pay it off before the interest-free period ends, and you don’t use the new card at all.

Cut it up as soon as you get it if you have to!

4. Use cash

Stop waving your phone about, cease tapping your debit card, and just withdraw a budgeted amount of cash each week for your needs.

The virtual world of cards and smartphone mobile wallets makes spending somehow disconnected from reality. It can run away on you before you know it. And there are all those surcharges

You’ll be surprised how your spending seems to almost rein itself in when you have actual cash and see the dollars disappearing from your real-world purse or wallet as the week goes by.

It’s a miracle!

Find financial freedom with GemLife over 50s resorts

Managing money in retirement can be like juggling. There are lots of balls in the air, and the big trick is in not dropping any of them.

You can simplify the act though by considering a move to a GemLife over 50s lifestyle resort.

Unlike traditional retirement villages, GemLife is a land lease community that features a streamlined financial structure with no entry fees, deferred management fees, or exit fees.

At GemLife, you own your own home and simply lease the land, where a modest weekly site rent pays for the resort’s maintenance and upkeep of the first-class resort facilities.

You get to live in a new high quality, low maintenance home in a community of like-minded people, even while you’re still working, and no rates to pay and lower utilities further decrease the stress on your savings and investments.

For more information, or to arrange a tour of one of our GemLife resorts, contact us today or request an information pack.