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 Who'd want to be a millionaire? - Eureka Report article 

Who'd want to be a millionaire?

By Scott Francis
February 24, 2010

PORTFOLIO POINT: Investment and pension income for retirees with smaller savings means they are only marginally worse off than those with seven-figure sums.

Investors who work hard to provide for their retirement get by with not much more than those who don't, according to a new Eureka Report study.

Our findings shows that couples who have saved as much as $800,000 for their retirement will have an income of just $128 a week more than a couple who have saved $200,000 - or roughly the same as the cost of a dinner for two at a modest bistro.

This is the chilling reality of a system that threatens not to provide enough incentive to those who are taking responsibility for their financial wellbeing, while providing for those who don't.

It's the perfect illustration of what's wrong with super right now at a time when the government may be considering measures that would make super even less attractive as part of the Henry tax review - by reverting to the taxation of superannuation income streams.

Knowing what to expect in retirement is complex: you require a working understanding of superannuation law, tax law and Centrelink rules. This article does not even get close to decoding all of these issues, rather it tries to pick the most important aspects of these, and provides a rough outline of what retirement might look like for people who have amassed different levels of assets.

The majority - but not all - Australians at retirement receive either a part or full age pension. The age pension rates were increased last year, with the full age pension for a single person being $17,469 and $26,338 for a couple (click
here). The extent to which any person receives this full amount, or a part pension, or nothing depends on their level of assets and income.

nRich retiree, poor retiree
Level of financial
assets
Home owning
couple/single
Age pension
income
Income from  
financial assets
Total  
income
$0
Single
$17,469
$0
$17,469
 
Couple 
$26,338
$0
$26,338
$200,000
Single
$14,661
$10,000
$24,661
 
Couple 
$26,338
$10,000
$36,338
$400,000
Single
$6,861
$20,000
$26,861
 
Couple 
$18,635
$20,000
$38,635
$600,000
Single
$0
$30,000
$30,000
 
Couple 
$10,835
$30,000
$40,835
$800,000
Single
$0
$40,000
$40,000
 
Couple 
$3,035
$40,000
$43,035
$1,000,000
Single
$0
$50,000
$50,000
 
Couple 
$0
$50,000
$50,000

While the powers that be push a line that those with a $1 million are "rich" and require no government assistance, and assuming a conservative draw down of $50,000 (or 5%) a year, it's worth noting that a couple with $200,000 saved will receive investment and pension income of $36,338 a year - about three-quarters as much as our "high net worth individuals".

Our "unlucky millionaires" also have the pressure of having to manage their own investments without the safety net of a pension. Many of these people are concerned that legislative changes will see them have to pay tax on their investments in retirement.

Those in the middle band - between $500,000 and $1 million - appear seriously disadvantaged. Despite putting away a considerable amount of money and saving the government millions of dollars, their years of sacrifice appear to have very little payoff.

Surely the table above, which shows how little extra income they see for the effort and risk they bear, is a justification for the government to keep its taxing little paws away. The tax issues for those with $1 million to fund their retirement income include the possible taxing of superannuation income streams, and highlight the importance of the franking credit system, which allows investors to claim back the full value of unused franking credits.

At the same time, this shows that superannuation investors with $100,000-400,000 have a nice incentive to build their financial assets and are able to put together a retirement income of more than $38,600 a year tax-free with $400,000 of assets. With the "stretching" of the assets test in 2007, which has allowed more people to qualify for the part age pension, and the pension increases in 2009, these investors have the chance to put together a reasonable tax-free income in retirement above and beyond the pension.

For the calculations in this article I have assumed that the single person or couple discussed own their own home. If a retiree does not own their own home they are able to have a higher level of assets before having their age pension reduced by the assets test, and they may be eligible for some Centrelink rent assistance. It is important to note that (in normal circumstances) the value of your home is not included as an asset for the assets test.

A home-owning couple can have up to $928,000 ($1,057,000 if a non-home owner) of assets and receive some part age pension; a single who owns a home can have up to $626,000 in assets ($755,000 if a non home owner) and receive some part age pension.

This is important to note on its own, as people who have seen the value of their assets fall during the global financial crisis may be entitled to some part age pension without realising it.

A few other assumptions that I have made in the modelling done for this article are:
  • The retirees are of age pension age when they retire. (If you are thinking about retiring prior to age pension age, you can work out how you will draw on your assets up to age pension age, and then use the figures here as a guide to what retirement might look like.)
  • There is no tax paid in retirement - given the current superannuation rules and the 'Senior Australian Tax Offset' for people of age pension age with assets outside superannuation, this is the most likely scenario for people in retirement.
  • "Assets" are financial assets such as property, shares and cash, and are invested in a portfolio that will provide an income stream similar to long-run average returns. (Note: Assets for the Centrelink assets test include such things as cars, furniture and boats; they are not included in the assets talked about in the article for investment returns.)
  • On top of people's financial assets I have assumed a further $50,000 in lifestyle assets that are included in the age pension assets test (such as a car, furniture, caravan).
  • There are two tests that might limit a person's access to the age pension: the income test and the assets test. Most people find the assets test more restrictive, and I have based my calculations on this test. Readers should be sure to check their own situation using both the income and assets test.
  • The assumption is that people draw on their financial assets at a rate of 5% a year, increasing this with inflation each year. The justification for this rate can be found in a previous article of mine, Tap your super, but how much?

The vast majority of retirees will qualify for at least some part age pension. It leaves an interesting question as to whether they should consider this in their overall asset allocation. For example, a $6000 a year part age pension, which increases over time with inflation, is equal to the sort of return you would currently receive from a cash investment of somewhere around $150,000.

Perhaps the financial assets of someone receiving a $6000 part age pension could be skewed more toward growth assets given the role of the part age pension as a "pseudo cash" investment. Further, once you receive some part age pension you will receive more if your assets fall in value (assuming that it is the assets test that is the most restrictive for you).

This is - perhaps - another reason to expose your portfolio to more growth assets, in that you are somewhat protected from falls in asset values by an increased part age pension.

Most Australians face retirement with a mix of age pension and their own assets. The figures in this article suggest that the two sources of income work together to provide most people with opportunity to fashion a reasonable quality of life in retirement, provided they have accumulated some assets themselves over the working phase of their life.

But I can't help but think that of all the scenarios looked at, those single home owners with $600,000 and above, and couples who own their home with $1,000,000 in assets and above, miss out big time as they are no longer eligible for any component of the age pension. That makes me think that any move in the future to try and tax their income, or diminish the value of franking credits in any way, would be unreasonable.

Scott Francis' articles in the Eureka Report 

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