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Home equity access and four challenges of retirement

Australian Baby Boomers are among the world’s wealthiest, yet they experience widespread retirement funding insecurity due to inadequate access to the three pillars of our retirement funding system:

*the age pension and social security system generally


*voluntary savings, including home ownership.

Our pension system is means tested, adjusting for variations in our non-housing wealth over time. In our superannuation savings system, however, Baby Boomers only began contributing 3% to their super half-way through their working lives.

For most, the bulk of wealth is stored in the family home. Retirees need to plan for long lives at home for 25 to 30 years in retirement. Few want to downsize or prematurely enter aged care. For many Australians, the question is how to fund their long lives at home with confidence.

New opportunities to fund retirement

So, the challenge is to support retirees by providing funding, housing, care and community throughout retirement to ripe old age.

Here are some new rules of thumb that can draw on all three pillars of retirement funding and meet the needs of the vast majority of retired Australian homeowners.

1. The longevity challenge of retirement

Australians enjoy remarkably long and healthy lives. An average Australian couple aged 65 can expect to be alive together for some 20 years and for the surviving spouse to live into their late 90s. This extended longevity brings both opportunity and challenge for Australian retirees with the uncertainty of knowing how much money is needed to provide for a comfortable retirement.

2. The housing challenge of retirement

Most older Australians wish to remain at home throughout retirement. Recent retiree research confirms that around 75% of homeowners aged 60+ wish to remain in their own home, leaving just over a quarter intending to downsize.

The recent pandemic experience has challenged the health, finances and confidence of a generation of older Australians. The Royal Commission into Aged Care, in combination with the high incidence of COVID mortality and morbidity in aged care facilities, has reinforced the overwhelming desire to age in place.

While many government policies are aimed to support in-home ageing – and in-home ageing is both popular and more cost efficient than institutional aged care – the overall funding of aged housing and aged care by government alone is insurmountable.

Part of the answer must involve recognising the fundamental dual role of the family home in both housing and savings. Another part is to allow retirees to better access to manage their wealth to fund their own retirement.

3. The funding challenge of retirement

Traditional approach: 4% drawdown

In the early 1990s, William Bengen demonstrated that an annual drawdown of 4% of savings at retirement each year would improve the chances that those savings would last 30 years. Around the world, variations of the 4% rule of thumb have often been used as the 'safe withdrawal rate' to ensure pension sustainability.

Since then two major changes have challenged the ability of the 4% rule to generate a sustainable retirement income: longevity has increased significantly over the past 30 years and we are now facing a significantly lower growth environment, with reduced interest rates, dividends and portfolio appreciation.

Let’s take the case of a retired couple, both 67 years of age with $250,000 in superannuation and owners of a $750,000 home trying to fund their retirement. The new reality of the long term, low growth outlook they face is: 5% pa returns on superannuation growth, 0.75% pa paid in fees to manage their investments and 6% pa investment volatility.

House price growth is 3% pa long term, with 3.5% estimated volatility of house prices and 5% pa home equity access cost. Long-term inflation is 3% pa. How can they navigate the next 30 years?

Scenario 1 – Drawing 4% a year of super in a low growth environment provides only 20 years of an inadequate income with the surviving partner living without any super

Clearly the 4% rule doesn’t go the distance and the couple’s retirement savings run out well before their expected longevity. These approaches have only been applied to the question of how to draw down a superannuation or investment portfolio balance.

In this 4% drawdown example, the couple were forced to live on a retirement income consistently well below the ASFA 'comfortable' standard and the surviving partner lived on the pension alone for the last seven years. The couple had little flexibility to maintain a quality lifestyle, manage unanticipated expenses like healthcare and in-home care, or even to fund and enjoy extended longevity.

The Australian retirement funding conundrum: drawing on all three pillars

Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology recently stated:

The third pillar, or voluntary savings, is incredibly important to the retirement security of Australians. For many, as we know, the family home is possibly the most significant form of voluntary savings that retirees have historically had, because retirees have historically had a very high level of home ownership compared to other countries than Australia. However, the family home is not actually considered a part of a person's retirement income.

The solution to this conundrum is arguably simple: access some of the home equity to improve retirees’ lifestyles. Australians, however, have no widespread experience of responsible, long-term access to home equity as part of wealth management and retirement funding. Quite simply, our system has not provided universal access to all three pillars of the retirement funding system.

The preceding challenge notwithstanding, there is hope on the horizon in new forms of home equity access that allow borrowers to release modest amounts of home equity on an ongoing basis, as well as provide flexible access to anticipate financial contingencies throughout retirement.

A new approach: 3+1% drawdown

Australian retirees are among the wealthiest in the world, with average wealth per household over the age of 65 years an eye popping $1,400,000. But in most cases, around $1 million of that wealth is stored in the home where the couple want to stay throughout their retirement.

Instead of the old 4% drawdown rule of thumb, to get through retirement with confidence, Australian retirees should use a 3+1% drawdown rule: draw down 3% of the value of your investments at retirement per year plus 1% of the value of your home equity per year.

By reducing the superannuation drawdown rate and adding an additional 1% per annum draw down from home equity, our couple could begin to achieve a retirement income that is both sustainable over more than 30 years and adequate relative to comfortable lifestyle standards.

Scenario 2 – Drawing 3% a year of super and 1% of home equity in a low growth environment provides lifelong and adequate income with additional available access to capital

Using a 3+1% retirement drawdown approach also provides our couple with the flexibility to draw additional funds along the way if they need to renovate the home, meet unexpected expenses, if they live longer than anticipated or they choose to give to their children and grandchildren before they die.

4. The challenge of a sustainable retirement

In providing a path to a sustainable and adequate retirement, the 3+1% rule of thumb has major implications for Australian retirement funding:

  • 3+1% provides a sustainable and adequate retirement funding plan for the majority of Australian retirees, not just those with $1 million in super
  • 3+1% would improve retirement outcomes, lifestyles, and wellbeing
  • 3+1% helps Australian retirees drawn on all three pillars of retirement funding flexibly throughout retirement to meet their own retirement funding needs
  • 3+1% harnesses the value of the family home for both retirement housing and funding
  • 3+1% diversifies retirees’ sources of retirement funding and improves the probability they will successfully fund their full longevity.
  • 3+1% preserves significant savings for retirees to be the bank of mum and dad and to bequeath to the next generation without unduly depleting available retirement funding
  • 3+1% supports age-appropriate housing for in-home ageing at all stages of retirement for couples and surviving partners
  • 3+1% maintains a significant reserve of value to fund in-home care and residential aged care
  • 3+1% would boost retiree consumption and provide a long-term stimulus to the local economy
  • 3+1% brings $1 trillion of retirees’ savings to bear on funding their own retirement without including the home in the assets test for the pension or imposing a death tax to recoup the costs of aged care services.


Joshua Funder is Chief Executive Officer of Household Capital. This analysis and the charts were created by Household Capital Pty Ltd using data from the ABS 2016 Census combined with mortality information from the Australian Government Actuary and Household Capital internal company data. Nothing in this report provides any form of financial advice.


December 11, 2020

I agree Max. For me, the last sentence sums it up. Even if we stick with a simple price analysis, if the long term growth rate is 3% and major cities are running at 10.6% CAGR over recent years, how long can this dichotomy continue without adjustment. The interest rate environment over the last 30 years has fueled this price boom. Can't see how that (interest rate environment) will sustain that fuel over the coming 30 years. This fascination with property as a long term store of wealth is interesting. If real estate was the panacea to wealth creation, why don't our major companies stockpile real estate stock. Instead, most profitable businesses in Australia have been significantly reducing their property portfolios over the recent decades. And when it comes to residential construction, I don't see many property developers willing to play the long game of property ownership.

November 15, 2020

The position of the family home in retirement planning has been distorted by our prevailing tax policies. Because there is no capital gains tax on the family house, and none of its value is taken into account when assessing pension eligibility, a very large proportion of housebuyers make the conscious decision to overcapitalise their family house as a very tax effective investment for their future. A family of four can live in a 150 m² house very comfortably, but they choose to invest in a 250 to 300 m² house knowing that the increase in its value over time will not be taxed in any way. If it was recognised that a significant proportion of the purchase price/value of a person's house was actually an investment decision, it would free the government to make decisions allowing things like debiting the cost of aged care services and perhaps even part of the pension payment against the rising value of a property over time, recoverable on the death of the house owner. This would open significant funding opportunities to improve the overall provision of care and support for people as they age.

Angela Hollands
November 14, 2020

I am confused. As far as I am aware, the SMSF legislation states that a minimum draw down for members aged 65-74 is 5%. Also, all 5% must be drawn from your super fund i.e. not 3% super + 2% from elsewhere. So, my question is how is it possible to over-ride the legislation to achieve your example of 3 + 1?

November 13, 2020

This example is not a realistic outlook in terms of performance returns and the 0.75% mgmt fee is a problem in a future world of low returns. The pension/super related rules are in serious need of review as these are "living in the past" and "not fit for purpose going forward".

Let’s take the case of a retired couple, both 67 years of age with $250,000 in superannuation and owners of a $750,000 home trying to fund their retirement. The new reality of the long term, low growth outlook they face is: 5% pa returns on superannuation growth, 0.75% pa paid in fees to manage their investments and 6% pa investment volatility.

House price growth is 3% pa long term, with 3.5% estimated volatility of house prices and 5% pa home equity access cost. Long-term inflation is 3% pa. How can they navigate the next 30 years?

November 12, 2020

Any thoughts on *how* I get to access 3% of my home's value each year? Bunnings will sell me a chainsaw no doubt! And after that... ???

November 12, 2020

The author's interest is shown via a link at the end of the article (in this case Household capital). Click on it and you can see that they offer loans to retired people with interest rates of 4.95% (while loans by banks to people paying off mortgages are below 2%).
It's worth doing projects to see just how much much of those benefits would disappear due to the much higher interest rates.

Paul (Household Capital)
November 13, 2020

The example in the post is based on the benefits of accessing 1% of the home value year as an income steam. This income stream can be accessed using a facility such as a reverse mortgage. Contemporary versions of reverse mortgages allow flexible access to a regular income stream, a lump sum or a contingency facility. Unlike a typical home loan, there are no regular interest payments with these products, so the rate is higher.

Frank Gomez
November 12, 2020

Is 3% a reasonable assumption for house price growth especially in Sydney and Melbourne where it is closer to 10% over the long term. Against an assumed 3% inflation, unless the author means 3% "real" house price growth then the assumption is flawed for most Australians. My neighbours in Sydney bought their property for $200,000 25 years ago and last week sold it for $2.5 million, a compound growth rate of 10.6%. They are downsizing to release money to add to their super which as baby boomers is not enough.

November 12, 2020

Define inflation? It's the same house, right?

Paul (Household Capital)
November 13, 2020

You’re correct to point out the growth in housing wealth has been far greater than 3%, particularly in Sydney and Melbourne. This of course has resulted in a significant proportion of retiree’s wealth created in their home relative to the savings (such as superannuation).

November 14, 2020

When you calculated 10.6% CAGR or assert that returns in excess of 3%, are you including the significant costs of real estate ownership, including but not limited to; stamp duty, real estate agent costs, rates, insurance, maintenance, renovation (they really lived in it for 25 years without significant renovations?), interest costs (often as much if not more than the principal for a 30 year home loan)?

If not, this is a similar frame used by a gambler to say they won $100 on the ponies, whilst omitting that they made bets of $500 in total.

This approach to real estate of sale price minus purchase price equals profit whilst extremely common, is seriously flawed, especially in the context of retirement and comparison to financial investments and super where most returns are net of fees.

Furthermore, as boomers divest from property willingly or by necessity, how will a market dominated by sellers maintain these multi million dollar prices? Immigration may carry some of the slack but will that be enough.

Neglecting financial investments in favour of the family home is quite a risky long term strategy.


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