Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 249

$1 million v $500,000 and accepting a pension

The article on why $1 million is always superior to $500,000 despite the potential loss of franking credits and age pension attracted many worthy comments. A reader, John Hyslop, asked about self-funding a retirement and staying off the age pension. John asked:

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

Let’s use the same basic assumptions as in your article but with a different mindset. The couples 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 age pension for as long as possible can. They realise that they can live a good life on $50k p.a. They will avoid major house extensions or ‘unnecessary’ spending simply to qualify for the age pension. Although being forced to make annual withdrawals from their SMSF, they could build up another investment reserve fund outside super using any surpluses.

Could you re-run the 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? I believe the system is unsustainable and is likely to produce inter-generational conflict.”

Hi John

Under age pension rules, a couple can have a home of unlimited value and receive a full age pension if their other assets are worth less than $380,500. The pension cuts out when assets exceed $837,000.

The couple with $500,000 will be eligible for a part-pension from the start which will make up half their annual income. The couple with $1,000,000 will start to receive a part-pension when they reach age 72 after drawing down some of their capital. Using the minimum drawdown rule would not impact the period until they become eligible for age pension because from age 65 to 75, the minimum drawdown rate is 5%, the same as the investment return.

The charts below show:

  1. Both couples will go on the age pension, unless they feel strongly that they should not be a ‘burden’ on the budget. This is typical of most retirees as even with compulsory superannuation since 1992, it is expected that 70% of Australians of eligibility age will still be drawing a part-pension by 2055 (see 2015 Intergenerational Report).
  2. When the Smiths become eligible for the age pension, they also receive their franking refunds (assuming not in an SMSF), and no longer need to drawdown capital to spend $50,000 a year.
  3. Due to the more modest lifestyle, neither couple runs out of other capital, so there will always be something in reserve for unexpected costs or a bequest.

It’s especially interesting to contrast the consequences of living on $50,000 versus $80,000 (in the previous article), with both couples trading off greater financial security for a lesser lifestyle, assuming money delivers lifestyle benefits.

Smiths ($1 million) versus Joneses ($500,000) based on $50,000 annual expenditure

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

8 Comments
Dudley
April 14, 2019

Until the home owning couple's capital reduces to less than the asset test $840,000 limit the comparison is between the risk free Age Pension and a risk free investment.

A home owning Age Pensioner couple with $0 capital receives a risk free $36,000 per year indexed to the highest of Wage, Consumer Price or Beneficiary Living Cost inflation.

A home owning Self Funded couple with $1,000,000 capital earning 1% real risk free has an income of $10,000 per year. To receive risk free $36,000 per year they need $3,600,000 invested at 1% real.

Graham Hand
April 13, 2019

Hi KW, Thanks for your comment. Please note, we are not licensed to give personal financial advice, and we don't know your full circumstances.

We also do not know the credentials of people who respond. They might not be properly qualified.

A better approach would be for you to contact a good financial adviser.

Graham
April 22, 2018

Hi Neil, assuming Labor is elected and can pass its plans, they announced a 'pensioner guarantee' that anyone on an age or disability pension will receive excess franking credits, including future pensioners. The date you mention (28 March 2018) specifically applies to SMSFs, where the SMSF must have had at least one member on a pension on that date to receive the franking credit refund. Disadvantages SMSFs. 'Pensioner' in this context does not mean a person with an SMSF drawing a pension from their fund.

Neil
April 22, 2018

Just to clarify, my previous comment is assuming the ALP form government and get its changes passed. My understanding might be wrong; that a person who was receiving an Age pension on the day the changes were announced keeps ALL franking credits. If one BECOMES an Ap after that one does not.

Laine
April 22, 2018

Neil

Any aged pensioner will still receive the full franking credits on their individual income with any excess refunded as cash. This is regardless of when they first became (or become) an aged pensioner.

Any aged pensioner who was a pensioner as at 28 March this year will also continue to receive the excess franking credits within their SMSF.

If you were not a pensioner at that date but later become one, you will receive the refund of unused franking on your individual income but not within your SMSF.

All this applies to a change in the system which is not yet law and may never become law.

There is also talk of them backdating their proposed changes to capital gains tax so the new rate affects any property bought from 1 July 2017.

Does this mean theat if you buy in 2017 and sell in 2018 after holding for more than one year and the ALP form govt in 2019 they can come back and charge you extra tax ???

How can anyone plan anything with these sorts of ad hoc and back dated policies.

Neil
April 22, 2018

"When the Smiths become eligible for the age pension, they also receive their franking refunds (assuming not in an SMSF),"? How So? There is no return of franking credits other than to offset tax liability.

Mark Reynolds
April 19, 2018

Is it just me, or is the assumption about franking credits "becoming available again once on the aged pension:, an acceptance by the author that the current government is doomed, and labor is set to win the next Federal election?

Bill Buttler
April 19, 2018

Thanks for this article. It's great to read something aimed at the man in the street for a change. $500k is a realistic target for most employed Australians, who cannot hope for the luxury of being able to live off income in perpetuity. However, there is a major qualification in the shape of the planning risk of relying on the continuation of current Age Pension eligibility rules.

 

Leave a Comment:

     

RELATED ARTICLES

Super is delivering for people about to retire

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

Retirement: Making income the outcome

banner

Most viewed in recent weeks

24 hot stocks and funds for 2021

Many investors use the new year to review their portfolios, and in this free ebook, two dozen fund managers and product providers give their best ideas for 2021 - some stocks, some funds, some sectors.

10 key themes for 2021

A summary of 10 investing themes for 2021 including early-cycle opportunities, populism, digital transformation and supply chains, plus the outlook for equities, fixed interest and alternatives.

Seven steps to easier management of your estate

Don't make life difficult for the person trusted to manage your estate. Find the time to arrange your documents, contacts, online accounts and files in a convenient place, including giving them some cash.

Five reasons Australian small companies are compelling investments

Many investors focus primarily on the big listed companies but the smaller end in tech, mining and healthcare outperforms through innovation. Many Australian companies are world-leaders in their speciality.

Two courageous responses to the Retirement Income Review

The Retirement Income Review has received criticism for compromising future super balances and not supporting the SG increase. The same result as an increase could be achieved by changing two other policies.

Retirement changes everything: a post-retirement investing framework

Categorising post-retirement needs – living, lifestyle, legacy and contingency – creates a framework for retirees. Advisers can translate these needs into investment goals and portfolios.

Latest Updates

Alternative investments

What to do when your collectibles become collapsibles

Collectibles are everywhere, from old cars, to sneakers, to wine, to cards and anything old and prized. But even if a collectible once attracted thousands of followers, what happens when the fans lose interest?

Financial planning

Compound interest rewards patience in an impatient world

Let compounding do its work. It starts slowly. This is why many of those who start an investment programme (or fitness programme, dietary change, sport, or business) give up in the early stages.

Shares

How did you go? Australian and global stockmarket winners and losers

The Australian market overall finished flat for calendar 2020, but the pandemic delivered big wins and losses. The companies, sectors and companies you invested in delivered vastly different results.

Investment strategies

What is endowment-style investing and who should use it?

For investors who have the scale, long-term investment horizon and lack of liquidity requirements, it makes sense to implement an asset allocation that can take advantage of a lack of constraints.

Investment strategies

Five ways to build investment portfolios amid growing inequality

At the start of the 20th century, a 'Gilded Age' for plutocrats created vast fortunes and economic inequality surged. COVID is having the same impact now, but portfolios can be adapted to respond to the opportunities.

Investment strategies

The hazards of asset allocation in a late-stage major bubble

The Grantham article everyone is quoting, in full. "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble ... this could very well be the most important event of your investing lives."

Investment strategies

Best and worst performing equity funds of 2020

Growth was the place to be through the pandemic while value managers couldn't catch a break. It's the long run that matters but 2020 delivered pleasure or pain for many managers.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.