What if you need to retire earlier than planned?

What if you need to retire earlier than planned?

Many Australians are forced to retire earlier than planned due to failing health. This can be a particular problem if you are not yet eligible for the Age Pension.

A case like this came up in a recent article posted on YourLifeChoices when factory worker Tina (63), asked about her retirement funding options and what might be available from Centrelink.

The article suggested that Tina – who still had a small mortgage on her home and $100,000 in super – may be able to leave her job and claim Newstart Allowance, but only if she was actively looking for another job.

Leaving work and then spending 10 hours a fortnight actively seeking another job in order to claim an allowance while she waited three and a half years to qualify for the Age Pension did not seem like the best possible option to the Smooth Retirement team.

We could not wait to model this case, using our equity release planning software, to see what other choices could be available to someone like Tina.

Not knowing the value of Tina’s house nor how much the “small remaining mortgage” was, we made some assumptions so that we could test the case and explore some other possibilities.

If Tina’s house was worth say $500,000 and her existing mortgage was $20,000, then by using some of the equity she has in her home, Tina could achieve the following:

• She could retire now, at age 63, and live off a net annual income of $30,000 per year between now and age 67, and likely a bit more after that, once she is eligible for the Age Pension.
• Between now and Age Pension age (3.5 years), Tina could live on a combination of regular “income” payments (drawings) from a reverse mortgage on her home and an account-based pension from her super.
• Her existing mortgage would be refinanced by the reverse mortgage, so she would no longer have to make repayments and service the debt from her income.
• Her net statement of position today would be $500,000 home + $100,000 in super minus $20,000 in existing mortgage = $580,000.
• In 10-years’ time it would be $545,000 (buying power would have reduced i.e. we have not reduced this number to illustrate the impact of inflation).
• At age 90, her net position would be $525,000 (as above, reduced buying power).

While a reverse mortgage does reduce the amount of equity you hold in your home over time, this is offset by capital growth on your property (which we have modelled at a conservative 2% per annum, year on year).

It is worth noting that the information above is based on our assumptions that the house is worth $500,000 and the existing mortgage $20,000. If these values were to change significantly, then the case would have to be remodelled and would potentially look very different.

An increasing number of Australians, like Tina, are heading towards retirement feeling anxious and stressed about they are going to fund all their remaining years. For people like Tina, working longer is not always a viable, let alone desirable, option.

By using a reverse mortgage as part of a long-term funding plan, Tina may be able to top up her income, reduce the drawings from her account-based pension, making it last longer, and provide herself with a known-income from now until age 90.

If you’re in a similar position to Tina and your house is worth more than all your other assets, then you should talk to us. It’s likely that you have many more options than you think.

Call our team today on 1300 510 015.

Smooth Retirement Pty Ltd is an independent service providing expert guidance in equity release and retirement income planning Australia-wide. ABN: 46 619 010 445; AFSL 510015; Australian Credit Licence: 510015; smoothretirement.com.au; info@smoothretirement.com.au; 1300 510 015. Terms, conditions, fees and charges apply. 

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