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$1 million is never worth less than $500,000

Hands up any home-owning retiree who would prefer to have $500,000 in other assets rather than $1 million. Anybody? What, nobody? I thought so.

So why did the headline in The Australian Financial Review of 7 April 2018 state, “When $1m is worth less than $500,000”, and leading names in superannuation offered their support for the claim? The respected SMSF specialist, Meg Heffron, tweeted,

“This is such a good article … And one of the worst things about this is not that it’s dumb policy, it’s the demonisation of people like the Smiths who have saved and sacrificed to get their $1m.”

Meg is right about demonising the wealthy, but the heading is wrong. The AFR article was accompanied by the following graphic:

The analysis assumes both the Smiths and the Joneses invest half their money in a balanced portfolio earning 5% and the other half in fully-franked shares. Due to the proposed Labor policy of allowing franking credit refunds for pensioners (worth $5,300 to the Joneses) plus the age pension itself (worth $26,250 to the Joneses), apparently the Smiths with $1 million are “worth less” than the Joneses with $500,000.

Accessing money to live on

Two simple examples show how the “worth less” claim can never be true.

First, suppose the Smiths renovate their house for $500,000 and otherwise retain the rest of their net worth by holding $500,000 in assets other than their home. Now they are in the same position as the Joneses regarding income. They receive franking credits and the age pension, plus they have a beautiful extension to enjoy in their later years. In future, the Smiths will have more money if they sell their more valuable house and downsize (and perhaps put it into superannuation from 1 July 2018 using the new downsizer contribution rules). They may even access more money if necessary through a higher reverse mortgage, for example.

Clearly, the Smiths are better off than if they started with only $500,000.

Second, in case anyone argues the AFR article is more about ‘money to live on’, a previous article in Cuffelinks by Gordon Thompson charts how a wealthier pensioner is better off by drawing on capital to supplement income. This is a legitimate retirement superannuation strategy. In fact, governments have often stated the intention of superannuation is not a tax-advantaged bequest scheme but to finance a retirement including drawing down capital. As Thompson says, “The goal of a retirement income strategy should be to maximise the retiree’s sources of cashflow over time. This can be achieved by drawing down savings in combination with a part pension.”

Here’s the crucial point some people are missing.

Once the Smiths have enjoyed living off the extra money, they still have $500,000, which is as much money as the Joneses. In fact, the Smiths will receive a part-pension as soon as their non-home assets fall below $837,000 when they also become eligible for franking refunds (assuming they do not invest via a SMSF, where the cut-off date for the ‘pension guarantee’ is proposed as 28 March 2018). The more they draw down on their capital, the more the age pension rises.

Real life for the Joneses and Smith

Let's re-examine the numbers with the same assumptions as above (all are homeowners aged 65, the two couples have a zero marginal tax rates and receive franking credit refunds when they are eligible for the age pension (full or part), current age pension rules apply and calculations are presented in real term with the inflation rate at 2.5%).

Let's assume both couples want a better lifestyle and live on $80,000 initially from the age of 65. The charts below divide the $80,000 of 'income' or 'cash flow' into four components:

  • Age pension
  • Franking credit refunds
  • Investment returns
  • Capital drawdowns

The charts show how the age pension and franking credit refunds kick in for the Smiths and how rapidly investment income falls for the Jones as they drawdown their capital.

The Smiths will reach the age of 88, or 23 years in an $80,000 lifestyle, before they exhaust their capital and rely on the age pension. If the Joneses wanted this lifestyle, their capital would be exhausted at age 78, a decade earlier than the Joneses. It would take the Smiths until the age of 75 or 10 years to reach the $500,000 held by the Joneses when they were 65. So much for the Joneses being better off.

Smiths versus Joneses based on $80,000 annual expenditure

The AFR article only considers the first year. As the Smiths spend more, they start to receive their franking credits and their age pension grows rapidly. Note that as these calculations are done in real terms, the 5% return on investments is only 2.5% and this also reduces the account balance.

We have run many simulations at different income levels and there are no circumstances where it’s better to have $500,000 than $1 million.

Overstating the disincentive to save and the black hole

A similar argument is often made against the Turnbull Government’s changes to the age pension taper test and thresholds which took effect on 1 January 2017. Some articles say it’s better to spend excesses above thresholds on ‘whatever you please’, almost as if it’s good to get rid of the money to qualify for more age pension. An extra $23,000 in age pension is 7.8% risk-free on $300,000, achieved by reducing assets from $800,000 to $500,000.

For example, the SMSF Association CEO, John Maroney, wrote on 9 January 2018:

“For home-owning couples who have a superannuation balance between $500,000 and $800,000, the increased taper rate creates a ‘black hole’ where their assets above the asset test free amount cause them to be worse off in terms of income. This is caused by the taper rate of the equivalent of 7.8%, reducing their pension entitlement at a rate exceeding the income they earn from their superannuation balance above the asset free area.”

John is right in specifying ‘in terms of income’, but superannuation involves a calculated drawdown of capital for most people. This is not only about 'income' but access to money and cash flow. The person with $800,000 or $1 million is better off because they have substantially more capital to draw on. They will go onto the age pension after they have enjoyed spending part of their extra capital.


Graham Hand is Managing Editor of Cuffelinks. My thanks to quantitative analyst Estelle Liu for assisting with the calculations.


March 08, 2021

Low yields / returns make much clearer the case for not having more than SweetSpot assets and then claiming the Age Pension.

Home owners with less than ~$2,300,000 assets excluding home would be financially better off dumping assets in excess of $400,000 into home.

Home owner couple maintaining constant retirement capital:

Full pension assets: 401,500 (SweetSpotAssets)
Part pension assets: 876,500 (SourSpotAssets)

MinimumWageAssets at 67:
= 2*FV((1+(1-15%)*6%)/(1+2%)-1, (67-30), -(1-15%)*9.5%*52*753.8, 0, 0)
= 422,324.48 (near Age Pension Sweet Spot)

MinimumWageCapitalWithdrawal from 67 to 95 maintaining SweetSpotAssets:
= 2*26*711.8+PMT((1+4%)/(1+2%)-1, (95-67), -SweetSpotAssets, SweetSpotAssets, 0)
44,886.15 / y

AverageWeeklyOrdinaryCapital at 67 (for comparison):
= 2*FV((1+(1-15%)*6%)/(1+2%)-1, (67-30), -(1-15%)*9.5%*52*1711.6, 0, 0)
= 958,942.13 (near Age Pension Sour Spot)

AverageWeeklyOrdinaryCapitalWithdrawal from 67 to 95 maintaining SourSpotAssets (for comparison):
= 2*26*0+PMT((1+4%)/(1+2%)-1, (95-67), -SourSpotAssets, SourSpotAssets, 0)
= 17,186.27 / y

SweeterSpotCapital at 67:
= MinimumWageCapitalWithdrawal/((1+4%)/(1+2%)-1)
= 2,289,193.60

SweeterSpotCapitalWithdrawal from 67 to 95 maintaining SweeterSpotCapital (for validation):
= 2*26*0+PMT((1+4%)/(1+2%)-1, (95-67), -SweeterSpotCapital, SweeterSpotCapital, 0)
= 44,886.15 / y

Ex-SweeterSpotter capital dump to claim AgePension
= SweetSpotAssets-SweeterSpotCapital
= -1,887,693.60

Darko Milic
April 25, 2019

Both couples are better off to spend all their super ASAP on themselves and rely on just the old age pension after that. Do not waste it on a home renovation or new car, and the kids will be fine. Retire at 65 and you may only live another year or two in good health (or die) so make it the best time of your life without any money worries. By the time you are in your 80's about 90% of all your friends will be dead.

April 18, 2018

We fixed a bug in our comment system tonight so if anyone has had a problem, please try again.

April 16, 2018

For me one large unknown is the cost of aged care which can can generate a large hit to whatever your balance is ................ here I am thinking one person stays in the family home

Michael P
April 14, 2018

I am very concerned with comments such as getting the young people to support me, the pension is welfare and so forth.

A lot of retirees are supporting young people, even if it just as a free babysitter so they can work or recreate. More than one retiree are digging into their pockets because of the children having a divorce, drug abuse etc

Others I know are working very hard as volunteers, doing work for free that is vital but no one wants to pay for.

Are these people sponges?

Michael P
April 14, 2018

Is to have saved and then be supporting yourself in retirement and not using the OAP a way of making yourself feel useful and making a contribution to the community?

Research says to feel like you are useful and having a purpose is very important to a persons mental health.

Once we stop work we can feel less useful and with no purpose.

And as you spend down your funds (spending wisely of course) you are making a further contribution.

April 14, 2018

Hi Graham, It would be interesting to know the total value of government pensions received by each couple over the first 24 years of the pension phase (65-88). Thanks.

From the graphs, my rough estimate is that the Joneses received a total pension of somewhere between $250K and $300K more than the Smiths.

Here is another way of looking at the overall outcome for the Smiths upto age 88 -
- they save more than the Joneses during the accumulation phase
- they pay more tax on their super earnings than the Joneses during the accumulation phase because their super asset is growing faster
- at age 65, they have $500K more than the Joneses
- in pension phase, their larger super asset continues to earn, even though capital drawdown begins

And the outcome?
- from 65 to 68, with no government pension, the Smiths miss out on the health card and other associated benefits
- the Smiths are better off than the Joneses for about 10 years only (79-88), by approx. $45K per year (assuming the full pension of the Joneses is a round figure of $35K)

So ... after beginning the pension phase with a $500,000 advantage and earning further income during pension phase, the total income enjoyed by the Smiths over 24 years (65-88) is just $450,000 ($45K x 10 years) more than the total income received by the Jones.

If I saved more than you during the accumulation phase, I would hope that the difference between our total incomes during pension phase would, at the very least, reflect that difference - other things being equal.

John Phillips
April 14, 2018

Thanks very much to Liam, John and Graham for the informative reply as it was most helpful. Also for the link to the fact sheet.

Mark Taranto
April 13, 2018

Cute way of looking at it, but why would anybody save the million in the first place just to blow it when your old and worn out. Just save $500k, go on the pension and get young people to support me.

Jan H
July 05, 2018

Mark, yes they would because old age is the most insecure time of one's life. And, don't forget today's retirees worked and paid taxes in an environment where the tax-free threshold was $6000 or less (up to 2000), wages lower, marginal tax rates higher, fewer or no family benefits, no super. And, the older ones actually lived through the War, perhaps even fought in it. Having also suffered financial shocks such as recessions and stock market crashes, they are very cautious and protective of their capital. My father had a policy of paying everything in cash, no debt. This meant saving hard and delaying self-gratification. Unlike today's young who must have it all NOW!

Liam Shorte
April 13, 2018

Please people don't cringe and complain about people worrying about dropping Income returns and the difference between $500k and $1m capital. Both of these couples have probably saved hard for their money and one of their fears is that at 65 there is 70% likelihood one of them will live past aged 90 in a very uncertain world. They have been through numerous market crashes and low and high interest rate environments. but always had their employment as a buffer to build back up their wealth..until now!

Until you are in a position where you no longer have the ability to go out and re-enter the workforce and are therefore reliant totally on your savings to last your lifetime, you may not really understand the fear that those retirees have about longevity risk. They are a generation whose parents retired at 60-65 and usually died at 61-75 where as they are retiring age 60-65 and likely to live to 85-105. This is a genuine fear and why people have saved harder and why they are so worried about using up their capital.

Are you prepared to guarantee their money will last, that there will still be a Age Pension safety net or that a sudden change in circumstances could require a huge capital outlay?

Remember they are not only looking out for themselves but many of them are having children and grandchildren arrive back on their doorstep after broken marriages, domestic violence, illness or injury and pick up the costs of supporting this additional family.. Believe me they do worry about all of these issues and that is why they worry a bout capital preservation

So before you groan and gripe about these people, walk a mile in their shoes.

April 16, 2018

At last, someone understands! Spot-on Liam.

If Graham was retired, he would also understand. It is ONLY about income in retirement. If the capital is drawn down too soon, the income stops (and you cannot afford the bond for the aged care home). The longevity risk is the single biggest issue among retirees today, closely followed by market volatility risk, and it is scary and freaks out most self-funded retirees!

This continual tampering with the rules is alienating a huge cohort. The mid-cycle baby boomers turn 65 in 2020 and the way that the lawmakers are behaving, they will ALL line up for the age pension. It will cost the Country very dearly, and it will be completely our own fault for not keeping the incentives to fund our own retirement. Why would you? As Mark says below - let the young people support us.

Also, as Jack says above, this is not about who is better off – it is about the lack of incentives for people to become better capable as self funded retirees.

Kathy T
March 19, 2021

there are annuities that can help deal with this fear!!

John Hyslop
April 13, 2018

This is a powerful analysis with great supporting graphics. Could Graham please run some numbers on two other couples?

Let's call them the Xs and the Ys, having $500k and $1m respectively, with the same basic assumptions about their retiring ages and home ownership.

However the Xs and Ys have a different mindset. They have always been self-reliant. They realise that they have been fortunate to save well, with generous taxpayer help in tax concessions, and essentially tax-free retirement. They are concerned that coming generations are being asked to fund a great lifestyle.

They aim to refrain from being on the OAP for as long as they possibly can. With this in mind, they realise that they can live a good life on $50k to $60k p.a. They will avoid major house extensions or "unnecessary" spending so that can qualify for the OAP. Although being forced to make annual withdrawals from there SMSF (so that they may be forced to go on the OAP!), they progressively build up another investment reserve fund outside super using any surpluses.

Graham, with these amended assumptions, could you kindly re-run your numbers to assess when they "have to go on the pension" - and with the possibility of being able to leave some inheritance for the kids?

Graham Hand
April 13, 2018

Hi John, we will write a short article next week responding to your question, but let me ask you this: the couple with the $1 million become eligible for the OAP when their assets fall to $837,000, which will happen fairly quickly. When you say, "They aim to refrain from being on the OAP for as long as they possibly can.", will they apply for the OAP when they are eligible?

John Hyslop
April 14, 2018

Hi Graham, I'll look forward to your response next week. Re your question on applying for the OAP, touche´.

I've been trying to understand the pension system, and believe that a house-owning couple on full pension plus, say $380,500 assets less say $100,000 for a car, furniture and personal effects etc, invested at 5% pa, would have a total income of around $39,600 pa, and presumably a couple with max assets would have a similar total income.

Clearly, a couple on max allowable assets would take the privilege or right of having the OAP!

It is just that I believe the system is unjust and unsustainable and is likely to produce inter-generational conflict. But how to reform the system ....?

john phillips
April 13, 2018

In regard to
"wealthier pensioner is better off by drawing on capital to supplement income by drawing down. Once the Smiths have enjoyed living off the extra money, they still have $500,000
Regarding Centrelink.
I believe, but stand to be corrected, That Centrelink look back x no of years and take into account sums that have been drawn down. If that is the case then by drawing down they may jeopardize their entitlement to the old aged pension. Which would be disastrous state of affairs.
I say this because of someone I knew had a $500K insurance payout but stupidly spent much of it over a few years. Subsequently tried to claim a Centrelink benefit but was refused on the basis that a certain amount of that $500K should still exist.

Liam Shorte
April 13, 2018

Hi John

No this is not correct in most circumstances but there are exceptions. Centrelink do look at commutations from income streams to re-adjust the Centrelink Deductible amount for the Age Pension Income test for older income streams (pre-1 Jan 2015) and they may ask what the funds were used for to ensure it was genuinely spent you. The ATO/Centrelink and the Government are not in the game of telling people how they can save or spend their own money (as opposed to benefits) yet!

They may however ask you to explain large reductions in savings to ensure you have not deliberately tried to circumvent the Gifting rules to access additional benefits. If you cannot adequately explain where those funds were spend they will investigate further and may find that you entered in to a scheme to circumvent the rules. They do have powers to access certain information from personal bank accounts in restricted format and may cross match data with the ATO to flag discrepancy.

An example is where a Pensioner Couple may have given their sons $200,000 in cash each shortly before they applied for the pension to reduce their assets. They may claim they had spent the money themselves but cannot show costs for major house renovations, no acquisition of assets, trip receipts, lifestyle explanation or even a gambling habits that would explain where the funds went. Centrelink may decide that they could not adequately explain the reduction in assets and therefore deem the some/all of the reduction as deprivation of assets and income and excess gifting which would then be deemed as an asset for 5 years.

October 10, 2019

thanks for the good info, Liam

Graham Hand
April 13, 2018

John, there's also a fact sheet here (courtesy of Liam):

October 16, 2019

Thanks Graham
I may not have checked thoroughly so forgive me as you may already have this on your site. Anyway if so here it is again. Worth a look at for discussion sake.

Regan Welburn
April 13, 2018

Brilliant article, Graham.

John De Ravin
April 13, 2018

Graham of course your point about the half million dollar renovation is right but what you are saying there is that a massive distortion is implicit in the Assets Test which favours application of surplus funds to an exempt asset. That is a very poor attribute of the means testing system.

However your other analyses are predicated on the rather inappropriate premise that the Smiths and the Browns both desire an $80,000 lifestyle until their money runs out, when they are happy to fall back onto the pension. What retiree wants to live the high life for a period knowing full well that such an expenditure level will mean that they will at some point fall back to the relative poverty of the age pension? The evidence is that the majority of retirees are guided by a desire to live a sustainable lifestyle which means that in practice they tend to spend down relatively cautiously, with many being guided by the statutory minimum drawdown rate for account based pensions.

If you do your calculations from this perspective you will see that the “black hole” critique does indeed have merit. Anthony Asher and I are writing a paper for the forthcoming Actuaries Institute Financial Services Forum in which we actually calculate “effective marginal tax rates” on a variety of assumptions meaning the present value of age pension lost as a consequence of holding an additional $100,000 at age pension eligibility age and I can confirm that in many situations where the retirees spend down sustainably, the value of the age pension they lose is MORE THAN 100% of the extra money they had at retirement. Hence Anthony’s comment above.

So what we have is an Assets Test that really does incentivise a variety of behaviours by retirees and pre-retirees that don’t seem to me to be in the national interest. The behaviours that are incentivised include NOT saving more than the lower Assets Test threshold, giving money away to the kids five years before pension age, spending down fast after reaching pension age if you have do have surplus assets, renovating or buying a more expensive home etc. That is a major public policy issue that warrants attention and unfortunately your article misses or downplays that point.

In your retort to Anthony Asher above you quote the Treasurer as saying that the Assets Test is supposed to encourage retirees to spend down their capital. Has he forgotten that the single (full) age pension represents a liability of something in excess of $400,000 to the Australian government, and something like $700,000 for a couple? It strikes me as odd that the Treasurer would be happy for the behaviours I mentioned above to be so strongly incentivised.

April 16, 2018

Another behaviour that the current asset test system encourages is for retirees to squirrel away cash around the house. Over a certain asset range they gain $780 in pension income for every $10k stashed away, less the $200 interest they would receive by leaving it in the bank.

This really is an extremely undesirable outcome. The pensioners are vulnerable to theft, they are breaking the law and the money should be out circulating in the economy, not hidden in the mattress.

April 13, 2018

In many cases, it's not the income that is the issue, but rather it's the concession card pensioners get and benefits over and above the public pension that is the unfair bit for self-funded retirees. Why save for a private pension when you can get the same income (in some cases) and all the associated reductions in the cost of power/phone/travel/medical bills/ pharmaceuticals etc? That is the real question for many.

Chris Jankowski
April 13, 2018

The examples given by Graeme start at 65 with one couple finding themselves with $500k and the other with $1m in super. As if that just happened.

But in reality these super balances are often results of evaluations and planning that couples make typically when they are 45 to 50. Mortgage is paid off and kids independent typically by then. These are also often their peak earning years. This is when the decisions where to put their ongoing savings are made.

They can put their money into super and have it locked up till they retire and in the meantime be exposed to government legislative risk.

Or they can do several other things:

- lend or gift the money to their kids, so the kids can put a foot into real estate market
- upgrade or renovate their own house
- or just spend it.

Whichever of the three is important for them. All three options will get them under the pension threshold, as the money vanishes from asset/income calculations for pension entitlement.

These deliberations will be repeated in Australia families millions of time.

I think that that after all the sums are done and risks evaluated the nearly universal answer for people fitting in this possible super range will be:

**** super!

April 12, 2018

Exactly Robert Bullock, +1.

Example 1 highlights the point of how this system can be gamed at the expense of taxpayers. Retirees living in McMansions seems a sensible use of resources...

Surely the point of that AFR article is also to consider that extra $500k has not materialised from thin air but involved sacrifice and opportunity cost for the smiths.

Michael O'Rourke
April 12, 2018

A deficiency in the article is that it does not consider what has happened in prior years.

Assume both Jones and Smith have had the same income for the 25 years prior to reaching 65. The Jones decided to spend an extra $10000 plus a year in each of the 25 years and enjoyed a better life for this period (This may not provide $500k in real uninflated terms after 15% tax in accumulation mode but is to illustrate the point).

The Smith's decided to save for later. Looking at the analysis in the article, under the new arrangement the Smith's commence to have a better outcome at 78 for 10+ years (ignoring that average life expectancy is 82.5 years)

So who will have had the better life? The spender or saver?

As the incentive to save additional amounts for retirement is not very meaningful (and even less so with consistently changing policy), the most predictable consequence will be an increasing number of people currently in the workforce doing their numbers and determining to access a pension in future years.

However as the article indicates the smart alternative for the Smith's in the here and now may be renovate the house for $500k and obtain the pension. Then if they need to, the Smiths can realise this value by downsizing to retain a higher income stream in their late 80's (assuming the kids don't already have the tax free proceeds due to their death at 82.5 years of age).

Which leads to the question - where will the tax revenue for the additional pension payments be derived from?

Graham Hand
April 12, 2018

Indeed, Michael, the Smiths did have to save more, but they also earned income on their higher savings long before they retired (or as you say, in the 'prior years'). They have a lot more in capital long before they retire.

Rodney Gibson
April 12, 2018

When I was very young, over 70 years ago, I would occasionally save my pocket money so that I could splurge on an afternoon matinee at the local picture theatre. Over the past 40 years I have managed to build up a “nest egg” in a SMSF which, to my children’s disturbance, funds about four overseas trips a year, in between my continuing to work.
I am very conscious of the fact that when I reach the age of 95 the Government will require me to take 14% of the capital in my name that is in the super fund and although I am not obliged to spend it I am, or will be, unable to keep that invested in a tax free haven which the kids and grandkids might have otherwise used to soften the blow of losing their favorite living ancestor.
Paul Keating deserves huge credit for enhancing the super environment and I think that my wife and I are model “super pensioners”, spending to enhance our later years. Sorry kids!

Graham Hand
April 12, 2018

Thanks, Rodney. That made me laugh out loud after a frustrating hour on the phone with Telstra.

April 12, 2018

The problem, as Graham alludes to himself, in describing how the Smiths could renovate their house for $500k - is that this is what this policy will lead to: a significant increase in the number of Aged Pensioners living in over-priced beautiful homes.

The incentive to over-invest in your home will be greater than ever.

Gen Y
April 12, 2018

There seems to be an opinion by SMSF retirees in particular that their capital is never able to be drawn down and they can only live off the income earned by that capital. They believe it is their entitlement to retain these assets in a tax free environment and to provide a nice lump sum to pay off their kids mortgages when they leave this world.

More commentators (Like you have done Graham) need to be educating these retirees that the purpose of their super is fund their retirement, this includes using both income and capital to fund this.

April 17, 2018

Maybe GenY can tell us when they became retired and then they can tell us how they managed the market risk demonstrated so violently in the GFC. Maybe they can also tell us how they intend to manage inflation risk over the next 30 years, how they intend to manage the longevity risk that they live longer than their money and the legislative risk that the government keeps moving the goal posts even after they were already in retirement.

Then they can tell us how they intend to manage all these risks when there is no opportunity to return to work to add to their savings and the Bank of Mum & Dad is no longer available.

But it is interesting that the people most keen for retirees to draw down their money in retirement are the people who do not have to manage these risks. They include, GenY, politicians and public servants. I think I see a pattern there.

July 05, 2018

I tell you how you manage the short term volatility of the GFC, or inflation/ deflation risk; you do nothing. Super is a thirty year plus investment. If you have your asset allocation right in the first place you do not need to do anything, but stay the course.

Longevity risk is overstated, because the growth assets in your (properly constructed) portfolio will still grow. Yes you may run out of super at age 90 (if you are lucky to live that long), but then you have the fallback position of the aged pension. Modest it is, but previous generations, such as those who experienced depression and war, proved you can live on the pension without starving if you are modest in your expectations.

Jan H
July 05, 2018

Jack: You are spot on. The thing that GenY does not understand is that SMSF retirees need a certain amount of capital from which to earn income. At today's bank interest rates, let's say 2.5% average, a capital base of $2 million would yield $50,000 p.a., which I suggest is a modest income, especially for a couple. Now, a higher yield can be obtained by investing in dividend-paying Australian shares with yields above 2.5%. At 5% yield. only, $1 million would be needed to earn the same $50,000. Even more income can be derived if shares are fully franked. And, ley's face it, not many retirees will have $1 million, let alone $2million in capital.

However, if as GenY proposes, the retiree draws down on the capital, then income is reduced accordingly, to the point where, if the capital is exhausted, the only safety net is the Govt aged pension.
Now, first. most self-funded retirees have absolutely no wish to go on the govt pension and have to deal with the dysfunctional CentreLink. which is the reason they have saved hard to be independent.

And, second, retirees need to save enough to afford Aged Care when, and if, they can no longer live independently. If they have a $1 million home they can afford the best Aged Care. But, if they have a home in a rural area, that home may be worth 350k or less. If GenY thinks it unreasonable to want to afford the best Aged Care, I suggest he/she visits a few centres where the "poorer" Aged end up and see if he/she would like to be there.

Third, many retirees would prefer to stay in their own home instead of being institutionalised. And to do so, they need to save enough money to pay for in-home care, people to keep house, cook, do the garden, repair and maintenance, etc. Not to forget, money for medical costs, health insurance, car, utilities, and food.

In all this discussion about greedy, selfish retirees, what everyone overlooks, including Bill Shorten, that these retirees are quite likely to suffer chronic pain, are becoming frailer, less capable of managing their financial affairs, and would LOVE to have the SECURITY of a guaranteed income that does not put them on the poverty line.

April 12, 2018

Can you please explain the impact of SMSF from this statement.

"In fact, the Smiths will receive a part-pension as soon as their non-home assets fall below $837,000 when they also become eligible for franking refunds (assuming they do not invest via a SMSF, where the cut-off date for the ‘pension guarantee’ is proposed as 28 March 2018)."


Graham Hand
April 12, 2018

Hi Mal, the Labor policy is to allow franking credit refunds for 'pensioners' (age or disability), but Bill Shorten announced: "Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.” So there is a 'grandfathering' proposed for pensioners in SMSFs, but with a cut-off date that has passed. 'Pensioners' does not mean people drawing a pension from an SMSF.

Robert Bullock
April 12, 2018

I think this is only half the story. the Jones have needed to invest additional money every year while they were working. If they put aside $10,000 every year for 20 years they may have around $500,000. So they have enjoyed the extra income every year while they worked. So it is not just retirement income it is everyday living before retirement that is better off. This is a bad policy.

July 05, 2018

Or the Jones had lower paying work in their lifetimes, because they had lower education levels, lived in the country as opposed to the city, or had additional medical costs, caring responsibilities etc.

I think of my parents who worked all their lives in low paying jobs (not much option when you only went to primary school), and were very frugal. You know, the type of people that would grow their own vegetables, mend their clothes and repair their tools. The didn;t even own a car.

They did own a modest three bedroom one bathroom home. I cannot remember them taking any holidays until the mortgage was finally paid off.

Although my father had a modest amount in super and my mother had modest other savings, they would love to have finished with $500.000 in total other assets.

There are many people like them in the poorer parts of this country who cannot save because of their circumstances, rather than simply being spendthrifts.

April 12, 2018

Of course it is better to have more resources than fewer because that gives you more options. But what about the person with $500,000? What incentive do they have to save to get to $1million. As they accumulate more, their income decreases, even by Graham's analysis. If/when they do accumulate more they will be required to spend it anyway because their income is so low. Graham agrees with Morrison - they should spend and let the future look after itself. So why not spend now rather than later? Many people are already saying: "Why bother saving?"

This is not about who is better off - it is about the lack of incentives for people to become better off to become self funded retirees. If you think this is not a problem, have a look at the 2015 Inter-generational Report. The ALP policy will take from some self-funded retirees to ensure they become age pensioners in the future!

Of course we should not accumulate capital with the help of generous tax concessions to pass on to our children, unless of course, it is the family home, free of the assets test and capital gains tax! Of course the tax payer should pay my age pension and age care so that my children can inherit the family home tax-free. Even with age care, the family home only represents an interest-free loan to the facility. The principal is still returned to the estate.

These policies distort decisions

April 13, 2018

Saying we should run down investments but still pass on the family home creates distortions. Great for homeowners in Sydney where ever increasing property prices means more inheritance, but not so great for people living in smaller capital cities, regional centres and rural towns; or those who decide to rent instead of owning a home. My parents and in laws both bought a house 50 years ago for $20k. My parents in Sydney are now sitting on a house worth $1.8m, my in laws in a regional centre are on $350k. Why should I be rewarded with a bigger inheritance than my wife purely because of where our parents bought their house. Including the house in an amended age pension asset test would help treat people equally. A variation is a close friend became divorced, the family home in Sydney was sold and both former spouses now rent. So no tax free inheritance of a family home to the children. The couple have each invested the sale proceeds of the family home. Why would it be fine to not run down the value of the family home, but they should run down the proceeds having sold it.

April 16, 2018

Hi Cam

I agree it is crazy that a pensioner can be living in a multi-million dollar home which is then left to the kids.

one solution would be to make all government pensions a loan - much like students have a loan. When the pensioner leaves the home through death or a move to aged care etc., the house is sold and the loan can be paid down.

April 16, 2018

Hi Jack

>it is about the lack of incentives for people to become better off

this is a problem throughout our welfare system where there are many "poverty traps" where people working to improve their situation lose some government benefit and hence end up no better off (and in some cases worse off).

the only way to rid us of all these distortions is to ban all means testing and give EVERYONE the same UBI (universal basic income). We would get rid of all other welfare (dole, pensions etc).

Ideally this would be combined with a flat marginal tax rate so no matter how much extra work you do, you will always receive the same percentage of every extra dollar you earn. There would no longer be any poverty traps with their high effective marginal rates (sometimes over 100%). This simplifies our ridiculously complex system and you end up with a progressive system which goes from low or zero income earners receiving negative tax (ie. the UBI is greater than the tax they pay) to high earners whose overall tax rate approaches the flat marginal rate (but never reaches it).

we would also save an enormous amount currently spent on running our social security system and stop all stress from government prying into our personal lives and accusing people of being welfare "cheats". If people want to live together then let them - it would no longer mean lower income.

I saw recently one political party mentioned a UBI and it was immediately ridiculed by media commentators who obviously did not understand its many advantages and how it is far simpler (and simply better!) than our current, inconsistent, complex system.

final outcome: treat everyone the same and don't penalize anyone for working hard and improving their situation.

April 16, 2018

If they just did this for people above retirement age it would go a long way to simplifying the retirement system for everyone.

All those over 65 would receive a pension and all their other income, whether in super or not, would be taxed.

With around 85% of people receiving some pension at present and considering the cost to revenue of the current super tax concessions, and the administrative costs to run Centrelink assets and income testing, I doubt that the govt would be any worse off.

It would also have social benefits far beyond monetary ones.

Retirees would know they had a secure basic income whatever their circumstances. There would be less stress for these people as they would not have to deal with complex financial strategies.

They would no longer have any incentive to retain large houses and could move to more appropriate accommodation without jeopardising their pension income.

This would improve the quality of life for these retirees who would no longer have the work and worry of a large run down house they were no longer able to properly maintain. This would also free up larger houses for families.

Retirees living in smaller easy care homes would allow them to be more active as volunteers in the community. This would benefit both the community and the retiree.

Retirees could work when they want without having to report to Centrelink and losing half of their income to pension cuts.

They could give assets to their children or to charity without penalty,

I believe that NZ has this system so we would have a model that could be looked at to see how well this would work.

Graham Hand
April 12, 2018

Hi Anthony, to quote Laura Tingle in the AFR:

"Scott Morrison has told retirees hit by tougher pension rules that they must run down their superannuation savings to maintain their incomes and can't expect to pass on to their children large sums of cash accumulated with the help of generous tax concessions."

Anthony Asher
April 12, 2018

You are certainly right in that $1m is better than $500K - but only if you spend it. If you do not spend it, and live off the income, you are worse off. Many retirees want to be cautious. Is it right to punish them for it?

April 12, 2018

What if future governments continue to make the income & assets qualifying criteria tests (for example, including the family home) even more onerous thus excluding more people from qualifying for the aged pension (as they have done in the recent past) as well as raising the aged pension qualifying age (as they have done in the recent past)?

Graham Hand
April 12, 2018

Hi John, if qualifying criteria continue to tighten, anyone with more money can 'enjoy' this money and then be in the same position as others who qualify for the benefits. The wealthier person has the benefit of a better lifestyle for a while, and then is no worse off. However, a policy to include the family home would be a massive change with broad implications, and in my example, the $500,000 would then need to be 'enjoyed' in other ways.

Frank Ashe
April 12, 2018

I'll gladly take $500,000 from people who have too much money! I don't mind having so much money that I can't get the pension.

April 12, 2018

Thank you Graeme. I also cringe inside every time I hear complaints about having $500K too much money.

April 12, 2018

Good Article. I cringe every time I read these '$1 million is worth less than $500,000' or 'The Sweet Spot' type articles. They never state the fact that the more savings you have, the better quality of life you can enjoy!


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