For most of us, 2020 has not been what we expected. Many resolutions made at the commencement of this new decade have been thrown out as we grapple with being separated from our loved ones, socially isolated, wondering when and where it will end.
At a time when many of you expected to be living your retirement dream, you’re instead concerned about your health – and in many cases, your retirement finances. While a pandemic is new to most of us, economic crises are not. It’s been just twelve years since the global financial crisis (GFC), which may well have impacted the retirement savings of many Life Begins At readers.
Super and volatile markets
Investments are subject to market cycles and from time to time, retirees may see the value of their invested capital shrink. That’s what’s happening in the current environment.
One lesson from the GFC was clear: drawing from a diminishing pool of capital – such as drawing from a super fund when markets are down – is not good for the longevity of your capital. This is because making withdrawals in a negative market will crystallise your losses. Importantly, it also limits the ability to recover those losses when markets rebound by reducing the exposure to positive returns
In other words, if you need to draw down capital from super to meet your income needs today, you will experience a greater impact as you withdraw funds from a diminishing pool of capital. The more assets that need to be sold to fund a retirement, the less available to generate future income. This is why the government reduced the compulsory drawdown rate.
Volatile markets and longevity risk
Longevity risk is a term you might hear bandied about when it comes to retirement; quite simply, it’s the risk you might outlive your retirement savings. And, given that Australians are living longer than ever, it’s a genuine cause for concern. Either you live a very frugal life and hope your savings will stretch as far as they need to, or risk running out money down the track. Neither scenario is ideal.
Volatile markets can exacerbate longevity risk when, as described above, you need to draw on your super at a time when doing so will crystallise losses in your portfolio.
When other income sources are drying up, what alternatives are there to super?
Home equity – a source of regular income
Australian retirees have more than $1 trillion saved in their homes. Using just a small portion of that household capital, or home equity, can provide an income stream that will complement the Age Pension and super – and at times like this, be used in lieu of super to preserve it. The following case study demonstrates that by using home equity, you can preserve your super so it lasts longer, thereby seeing you through this difficult time and reducing your longevity risk.
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Case study
Robert and Trish, a 65 year old couple from Keilor, Victoria have $280,000 in superannuation and own their home, valued at $900,000. They draw $2,000 a month from their super fund and receive $2,847.20 a month from the Age Pension.
The couple has three objectives:
- To make super last as long as long as possible
- To maintain their current lifestyle
- To stay invested for a long-term market recovery
As illustrated, Robert and Trish expected to draw an income from super for 15 years of retirement. If they continue to draw the same income in the current market environment, the modelling shows their super could run out in eight years. They would fail to meet their first objective.
If however, they use home equity to top up their income to ensure they can continue to maintain their current lifestyle (second objective), it will also help Robert and Trish to meet their other objectives.
Robert and Trish want to ensure their super lasts as long as possible, so are keen to keep it invested so they can benefit from a stockmarket recovery. However, they don’t want to sacrifice the retirement lifestyle they worked hard to achieve. Using their home equity allows them to accomplish this.
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What is a Household Loan?
Home equity is considered to be the ‘third pillar’ of retirement funding, along with super and the Age Pension. It can be used to provide a regular income stream or a lump sum payment.
Our Household Loan is a type of reverse mortgage that’s been designed to work within Australia’s retirement system. It can help you access your home equity, the wealth accumulated in your home, to enhance your lifestyle and wellbeing in retirement, without needing to sell or downsize.
A Household Loan doesn’t require repayment until you vacate the property, although offers the choice and flexibility for you to make repayments at any time you wish. Importantly, it comes with a range of consumer protections, including guaranteed occupancy for as long as you want to live in your home.
If you would like to explore how a Household Loan could improve your retirement lifestyle and help your super last longer, please call us on 1300 622 100 or check out our online calculator to see how we can help you.
Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876.
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