Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 370

Five ways to use the family home for retirement income

The family home is set to become a more integral part of many people’s retirement income strategies. There are myriad reasons for this to happen but three stand out:

1. Inadequate superannuation balances

The federal government is still doing the heavy lifting in supporting most people in retirement via a part or full pension, despite Australia having compulsory superannuation for nearly 30 years. Most people will remain eligible for a pension at retirement.

It’s not hard to understand why. One of superannuation’s commonly quoted benchmarks, the ASFA Retirement Standard, maintains that for a couple to enjoy a comfortable retirement they need an annual income of $62,000. Nothing lavish, but comfortable.

That number is based on assumptions such as a couple owning their own house, but it excludes savings and investments outside super and having no other sources of income in retirement.

So how much money is needed at retirement to fund this annual income? According to SuperGuide, to earn $62,000 for 25 years, a couple’s required savings spans from $410,000 (assuming a 7% return) to $1,020,000 (assuming a 2% annual return).

With the cash rate at 0.25% and volatile markets, assumptions about investment returns should probably tend towards the more conservative end of the spectrum. But even at a generous 4%, $700,000 is required.

Yet that sum of $700,000 falls well short of the average balance at retirement, estimated to be about $450,000 for men and $375,000 for women. These people will go on to a part pension, at least. And that’s not about to change, with the Productivity Commission’s 2018 report showing an average fund member enjoying the Super Guarantee all their working lives will still fall short of this target.

These numbers were also compiled before COVID-19, and this tragic pandemic is already having an impact on its assumptions in one obvious way: the government’s decision to allow people to make early withdrawals of up $20,000 from superannuation for the 2019-20 and 2020-21 financial years. A 30-year-old who withdraws the $20,000 is sacrificing an estimated $43,000 on retirement at age 67.

2. Longevity and demographics

The flip side of superannuation balances falling short is demographics. Some couples will live longer in retirement than 25 years. In 2017, there were 3.8 million Australians aged 65 plus or 15% of the population, a figure that is projected to grow to 8.8 million by 2057.

Looked at another way, 57% of seniors were aged 65-74 in 2017 and 13% aged over 85. By 2047, 20% will be over 85, with all the fiscal ramifications that implies. This ageing population will remain fitter and healthier for longer in retirement, ensuring bigger demands on their retirement savings.

3. Fiscal limitations

The federal government’s stimulus packages to counter COVID-19 means Australia is experiencing its biggest budget deficit since World War II and future governments will need to rebuild the country’s balance sheet. It would be naïve to think that future treasurers will not cast an envious eye over the super honey pot that is approaching $3 trillion.

At the last election, Labor signalled its intention to limit the claiming of franking credits on Australian equity dividends. Although that proved politically unpalatable, the country is now in a far more fraught fiscal position. Tough times could demand tough measures.

There are at least two other tax options: increasing the headline super tax rate of 15% and reducing the capital gains concession from the current one-third. Although the latter would have minimal fiscal impact, the former could do some heavy lifting.

But robbing Peter (Australians in the accumulation phase) to pay Paul (the deficit) would come at a high cost to the former, with research showing that lifting the tax rate to 25% would cut $150,448 off the retirement savings of someone retiring at 67 on $682,146 (the Productivity Commission’s projected figure).

Five ways to use the family home for retirement income

The coalescing of these three factors suggests future governments will want the home to play a bigger role in people’s retirement income strategies. It would surprise if the pending Retirement Income Review did not take a close look at how this asset can be better utilised as part of a retirement income strategy instead of simply being an inheritance for the children or grandchildren. The median house price in Sydney is about $1.1 million and in Melbourne $900,000.

Currently, there are five ways the family home can be used to generate income, and they all come with pros and cons. In the future I would expect there will be greater sophistication about how this asset can be used for an ageing population with limited superannuation and governments needing to rein in the deficit. But this is what’s on offer now, with some benefits and costs:

1. Downsizing

  • Depending on the state of the property market and seller’s price ambitions, sale time can be relatively quick.
  • Good option for those seeking a sea change, tree change or simply smaller accommodation.
  • The cost of selling and relocating can be prohibitive, including agent’s fee, advertising, stamp duty on new property, any modifications and relocating expenses. The costs eat into the gain.
  • The emotional stress of being unable to afford to relocate in the same area and having to move away from family, friends and familiar surroundings.
  • The potential ability of the over-65s to put some proceeds into superannuation.

2. Reverse mortgage

  • Equity release product allows access some of the capital in the house.
  • Minimum age to participate is 60.
  • Typically, mortgage limited to 15-20% of the equity, minimum loan $10,000.
  • Choice of regular payments, lump sum or both.
  • Better suited for those without dependents.
  • A credit product so financial planners need an Australian Credit Licence (ACL) to offer advice.
  • Only available in selected postcodes.
  • Interest rates fluctuate and can move against borrower, with the consequence of reducing equity in the property, so the final outcome is unknown.
  • Take-up of this product has declined, in part because people, having paid off their house, are reluctant to create another debt over it.
  • Interest owing on the debt is capitalised, increasing the debt burden.

3. Government Pension Loans Scheme

  • Government reverse mortgage offering regular income stream, can be short-term or indefinite period.
  • No lump sum payments.
  • Regular payments cannot exceed 150% of the pension payment.
  • Loan can be repaid in full or part at any time.
  • The full amount of the loan plus interest owed at the time of the death of the person will be recovered from the person’s estate.
  • Current interest is 4.5% with eligibility requirements.

Register here to receive the Firstlinks weekly newsletter for free

4. Wealth release

  • Offered by Homesafe Solutions, a joint venture between the Szabo Group and Bendigo Bank.
  • Launched 15 years ago to provide a debt-free equity release solution for older Australians.
  • Unlike a reverse mortgage, Homesafe buys a share of the future sale value of a house. The homeowner retains the title deed.
  • Homesafe calculates the payout based on (a) the future share of the house to be sold (b) homeowner’s age (c) house value today. The payout can range from $25,000 to $1 million.
  • In return for a lump sum up front, Homesafe receives an agreed percentage of the future sale proceeds of the house. There is no time limit on any sale.
  • Homeowners can buy back their share at any time.
  • Homeowners can still rent out the property and retain the income.
  • It is a real estate product. Financial planners cannot offer advice on it.

5. Fractional senior equity release

  • Currently only offered by fractional investment manager DomaCom.
  • Equity-based not debt.
  • Accessed exclusively through licensed financial planners requiring seniors to obtain advice first.
  • Investors get a fixed rental income and a share of the property’s capital gain at the time of sale.
  • Investors can include family and friends and may be able to use their superannuation to invest.
  • Base service fee is 4.4% p.a. fixed for life of the contract.
  • Seniors have permanent right of abode.
  • Some of the equity released is used to pay rent on the ‘fraction’ of the property released.
  • If the homeowner chooses, they can rent the property out and keep the rent.
  • Choice of lump sum or a regular payment.
  • Maintenance, repairs and insurance are shared with investors.
  • On selling, seniors and investors each get their percentage of the sale price.

In future, expect the government to demand the family home pay a greater role in financing retirement, with borrowers needing to assess the wide range of products available for their unique circumstances.

 

Arthur Naoumidis is CEO of DomaCom. This article is general information and does not consider the circumstances of any investor.

 

3 Comments
Chris Jankowski
August 13, 2020

Something seems to be wrong here:
>>>> Yet that sum of $700,000 falls well short of the average balance at retirement, estimated to be about $450,000 for men and $375,000 for women.

The $700,000 was given by the author as a minimum for comfortable retirement for a *couple* (with certain assumptions - draw down of $62,000 p.a for 25 years with 4% returns (nominal?)). Average couple will have $450,000 + $375,000 = $825,000. This is more than the stated minimum of $700,000. The author suggests otherwise.

Jack
August 13, 2020

All this ignores the fact that in many cases the family home is used to pay for age care. If we “eat” the equity in family home to supplement our retirement income, how much is left to pay for age care - and this is a system already at financial breaking point.

The point is that, in age care, the Refundable Accommodation Deposit is refundable - it is really an interest-free loan to the care home and the beneficiaries still get to inherit the capital.

Maybe the answer is to claw-back some or all of this government support for 30 years of retirement income and age care from the estate. And if we really are going to live to 90, maybe our 60 year old children will not need that inheritance.

Rose
August 30, 2020

As some one who has watched the age care industry over many years, I would like to comment on this. The change in government policy about 2014 was to support people to stay in their homes as long as possible so that they only are admitted to care when they really need it. While there is controversy over the provision of Home Care packages to support people aging in their homes, there is no doubt in the industry that when people are admitted to a facility they are frailer and in need of a higher level of care than previously. This is one of the issues in funding for aged care that residents are now all high care but the funding model currently used still assumes that some residents have some capability. There is no doubt the Royal Commission will recommend increasing funding but how that will happen is anyone's guess.

For most people at retirement age provisioning for their care at the end of their life is a real concern. One proposal I have seen is that people pay a proportion of their superannuation at retirement towards the future bond for a nursing home. This would "earn" a deemed interest rate and then the entire sum would be put towards the bond for a nursing home when needed. The figure I have seen used in calculations is $200k. The government has the use of this money to build and fund nursing homes until the retiree needs it meanwhile the retiree gets the equvalent of franking credits from the government. Effectively the retiree is buying shares in the aged care industry.

 

Leave a Comment:

     

RELATED ARTICLES

There’s a lot more to retirement incomes than super

Housing cost is biggest threat to a comfortable retirement

Home equity release, the fourth pillar of retirement funding

banner

Most viewed in recent weeks

Five ways the Retirement Review points to new policies

The Retirement Income Review goes much further than an innocent-sounding 'fact base', and is sure to guide policies in the run up to the next election. It will change how we think about retirement incomes.

Graeme Shaw on why investing is at a pivotal moment

Company profits have not improved for many years but higher valuations have been driven by falling rates and excess liquidity. Conditions do not suit a value and contrarian manager but here are some opportunities.

Retirement Review gives strong views on hoarding of super

The Review includes some profound findings, most notable that retirement income should include drawing down far more capital. Expect post-retirement products to proliferate under a Retirement Income Covenant.

11 key findings on retirement dreams during the pandemic

A mid-pandemic survey of over 1,000 people near or in retirement found three in four are not confident how long their money will last. Only 18% felt their money was safe during a strong economic downturn.

Bank scorecard 2020: when will the mojo return?

Banks severely cut dividends in 2020 but are expected to improve payments in 2021. History provides clues to when the banks will return to their 2019 levels of profitability, but who is positioned the best?

Generational wealth transfers will affect all investors

It's not only that 60 is the new 40, but 80 is the new 60. Many Baby Boomers spend up in retirement and are less inclined to leave a nest egg to their children. The ways wealth transfers will affect all investors.

Latest Updates

Retirement

Five ways the Retirement Review points to new policies

The Retirement Income Review goes much further than an innocent-sounding 'fact base', and is sure to guide policies in the run up to the next election. It will change how we think about retirement incomes.

Property

Steve Bennett on investing in direct property for the long term

As people stayed home during the pandemic, a bearish view swept over most property sectors, but many have thrived and prices have recovered rapidly. The best opportunities are in long leases with quality tenants.

Retirement

Retirement Review gives strong views on hoarding of super

The Review includes some profound findings, most notable that retirement income should include drawing down far more capital. Expect post-retirement products to proliferate under a Retirement Income Covenant.

Superannuation

Paul Keating on why super relies on “not draining the bath”

Paul Keating is the champion of compulsory superannuation as the central means of funding retirement. In the wake of the Retirement Income Review, he is at his passionate best defending the system, with Leigh Sales.

Latest from Morningstar

Is your portfolio too heavy on technology stocks?

Investors with heavy allocations to a broad US index should check how much is exposed to tech stocks, especially when valuations look a bit steep. It might be time to reallocate to other sectors or styles.

Investment strategies

Beware of burning down the barn to bury the debt

At some point, policymakers will turn to the task of deleveraging, to work off massive debt burdens built up during the pandemic. Australia is already ticking the boxes on many policies used in the past.

Superannuation

New bankruptcy rules may have a domino impact on SMSF pensions

During COVID, bankruptcy rules have allowed small businesses to trade while insolvent. It may mean an SMSF is hit by the collapse of a business leaving trustees struggling to meet their own legal obligations.

Sponsors

Alliances

© 2020 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.