Resilient retirement strategies – Key to prevailing from life-changing uncertainties

Retirement planning for couples typically include a range of considerations like addressing longevity risk, considering social security entitlements and making provisions for major life changes. Despite the unpredictability of certain critical life events, being equipped with an appropriate contingency plan can help reduce the potential impact. 

This article examines four potential life changes for couple clients in retirement, their impacts, and key considerations and strategies that can help cushion the effects from these life changes. 

Unless otherwise specified, Centrelink rates and thresholds used at the time of writing are as at 20 September 2023. 

Downsizing the family home 

It is not an uncommon scenario where retiree couples find the need to downsize, either to move closer to their children and grandchildren or due to the unwillingness to maintain a larger home. In such cases, the principal home is usually sold with the intention to purchase/build a new home. 

Social security laws allow the part of the home sale proceeds intended to build or buy a new home to be exempt from the assets test for up to 24 months¹ . However, where the proceeds intended to buy or build a new home are held in a financial investment, a lower deeming rate (currently 0.25%² ), applies for income testing purposes. Refer to our article Changes to the home sale proceeds exemption on AdviserOnline for further information on the exemption rules.

Impact 

The increase in assessable income and assets from surplus monies left over after the new home is purchased/built, can impact Age Pension entitlements. Age Pension reduces by 50 cents p.f. for each dollar over the income free area and $3 p.f. for every $1,000 worth of assets over the asset free area. Where clients see a reduction to their entitlements, certain strategies can be considered to help cushion the impact. 

Strategic considerations 

Where one member of the couple is under Age Pension age, using a sheltering strategy by contributing to the younger member’s superannuation can help reduce their assets assessment. As long as monies are in accumulation phase, they are not assessed as an asset for those under Age Pension age. For spouses who may have a few years before they reach Age Pension age, Non-concessional Contributions³ (NCC) can be spread over a few years, especially if the amount is higher than the maximum bring-forward cap of $330,000. Note that from 1 July the annual NCC cap will be increased to $120,000, which brings the maximum bring forward cap to $360,000. 

Downsizer contributions of up to $300,000 per person can also be utilized subject to meeting the eligibility requirements. Downsizer contributions have no upper age limit, no total super balance restrictions, no work test criteria and does not count towards a person’s NCC cap. Spouses can either use downsizer to save their NCC cap space or can use it in conjunction with NCC in case of larger contribution amounts. 

Strategies like gifting up to the allowable limit ($10,000 per financial year and a maximum of $30,000 over a 5-year rolling period) and/or bringing forward certain planned future expenses like home renovations, travel, prepaying funeral expenses or purchasing funeral bonds can be considered. Prepaid funeral expenses or buying a burial plot, irrespective of their value, is exempt from Age Pension assessment. Alternatively, funeral bonds⁴ , up to the exempt threshold (currently $15,000) can be purchased. Lifetime income streams can also be considered for asset tested clients as explained in the next life event and case study 2. 

The additional capital that may come from downsizing the family home can also mean that clients are now able to spend more in retirement and achieve more of their goals. Reviewing and retesting retirement income strategies can help provide clients with confidence around their current or new spending levels. 

Case study 1 

After retirement, Mark and Karin (both aged 67) decided to downsize their Sydney home (worth $1,400,000) and move to Melbourne to be able to spend more time with their grandchildren. They receive a combined part Age Pension of $818 p.f. based on $275,000 each in superannuation, $120,000 in shares, $10,000 in personal assets and $50,000 in their bank account. They sold their home in Sydney for $1,400,000 and purchased a new home in Melbourne for $1,100,000. After purchasing their new home in Melbourne, they contribute the surplus funds of $300,000 to their superannuation using the downsizer contribution. As a result of these surplus funds now being assessable, their asset level surpassed the current assets test cut-off ($1,003,000) and they lose their part pension entitlement. 

However, despite the loss of their Age Pension entitlement, the receipt of surplus funds has now increased the likelihood that they would be able to secure and maintain a ‘comfortable’ lifestyle5 income of $71,724 p.a. in retirement. Of the 2,000 market scenarios provided by Moody’s analytics, 59%6 of these scenarios currently allowed the couple to achieve their desired income until their combined life expectancy (age 94). This increases to 89% with the additional funds after downsizing.

Figure 1 – Portfolio stress test – Current retirement savings vs surplus funds added to retirement

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