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Ask Paul: We’re worth $1.5 million – how can we claim the pension?

ask paul clitheroe ask paul money magazine superannuation claim the pension investment property ppor earn too much sweet spot 275 to retire

Q. My wife (68) and I (63) own a property in Brisbane valued at around $725,000.

We have a neutrally geared investment property on the Sunshine Coast valued at around $650,000 with $215,000 left to pay on the mortgage.

Our combined superannuation is $360,000. We both work full time – my wife’s income is $130,000 and mine is $72,000.

We both salary sacrifice the maximum amount. 

We’re looking at cutting back our hours and selling our rental property, then renovating our principal place of residence.

Having read the Money article on why you only need $275,000 in super to retire, we would like to qualify for the age pension.

Should we invest most of the money in our renovation, making the house better? – Jimmy

A. Hmmm. This is a challenging question, Jimmy.

You have a home worth $725,000 and some $795,000 in super and equity in the investment property.

Technically, it sounds nice to spend some $500,000 on a huge renovation, leaving you with $275,000, but it is not that simple.

The obvious question is, if you did this would your property be worth $1.25 million? If not, you are just throwing money away.

I guess you could buy a new home for $1.25 million but you will incur a heap of costs, such as agent fees, stamp duty and so on.

My suspicion is that potentially throwing money away is no way to get an aged pension.

I really want you to see a fee-for-service financial adviser to run the numbers for you and in particular build you a “life model” showing how you want to live, the money needed each year to fund this and the best way of going about this.

My suspicion is that you may well start on a very small aged pension, which may grow over time.

But this question is too important for a few words here. Please see an adviser.

Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Ask Paul your money question.

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  1. Pretty simple really…stop being greedy. There’s other people who desperately need it and stories like this make me sick, they’re just people who are looking to hide assets away and appear poor on paper. That’s fraud in my book.

    You’ve got $795k left over after you sell the investment property, pay that mortgage off and count your superannuation, assuming that your PPOR is debt free.

    If you can’t live on $795k in a $725k house, throwing off approximately $40,000 a year tax free on 5% dividends and a capital growth free kick, then there’s something wrong, and I think what’s wrong is the entitlement mentality, “eeeeh, I’ve paid taxes all me life and now I’m entitled to a pension” that the boomers have.

    Simple, be like Gen X and Y, when we retire, we will be the REAL self funded retirees. When we retire, our house will be means tested, so they’ll say “What, can’t you live somewhere else ?” because our houses (assuming we’ve paid them off) will be worth a million, and then you have the cachet of being “a millionaire” and how cliché that is. We’ve also had superannuation, so that will be means tested as well.

    When we retire, there won’t be a pension, and if there is and you want it or even qualify for it based on the above, you won’t want it because it’ll be so low and subject to so many hoops being jumped through, it’s easier not to get it.

  2. How is he being greedy. He probably paid taxes for 50 years and is
    Is now punished for saving!!!

    If he lived in Sydney the average house price is $1.1M. This would leave $400K In an allocated pension earning 5%. His income would be
    Age pension $32K
    Allocated pension. $20K. (400K @5%)
    $52K

    His income in retirement would only be 40K with an allocated pension of $795K

    That’s $12K less

    • And Gen X / Y will have paid taxes for 50 years too when we get to that stage. Your point is ?

      Mine is this – did you ever use schools, libraries, police, hospitals, roads etc. ? That’s where your taxes went, they were never intended as a giant Ponzi scheme to bail out each successive generation because it’s unsustainable. That’s why companies on the old DB schemes have billions of dollars of liabilities, and everyone is now on DC (Defined Contribution) schemes, except the top brass.

      Your assertion about the average house price in Sydney is a red herring. He already has his house – “we own a property in Brisbane valued at around $725,000”. Nothing to do with Sydney, there are plenty of places to live in Australia, not just Sydney.

      Assets (excluding house and not including any salary) = $360k (super) + $650k (Inv. Prop)
      Liabilities = $215k mortgage.

      Therefore, $360k + $650k -$215k = $795k net worth excluding house (and any savings from the salary after this point on is just cream on the cake), even if the bank asked for all their mortgage money back tomorrow, you’re ahead by a huge amount.

      If that $795k was invested into a portfolio that threw off 5% per annum as dividends (this is very conservatively speaking – there’s much better rates of return out there – and talking fully franked dividends because of being over 60 and / or on fully franked shares for example), capital growth is a free kick and you’re getting $39,750 a year tax free, keeping ahead of inflation. This would be equivalent to a wage of around $60k and remember, the house has likely been paid off.

      You don’t NEED a pension because that’s not the intent of it and never was. This is what I am spelling out above, that few seem to understand clearly; that if you can’t live on $39,750 a year tax free with such an asset base under you that you can potentially tap if you need to (as Gen X and Y will be forced to if they want a pension), there’s something very wrong.

  3. Greg is more correct than Mike who appears to have a massive brick on his shoulder. Why is this couple the ‘selfish generation’? Because they won’t hand it all over to the younger self entitled generation? People of this generation were not handed heaps on a plate either. People of this couple’s generation were promised that their taxes they paid were a surety for their pension in later years. Now aged 68 and 63 they only have $360,000 in super – that is because superannuation was started late for those of their generation. It did not start with their first job like it does now.

    $795,000 is not a lot to last to very old age and its accompanying expensive health issues. Of course, it is a lot compared to those who did not save or subject to very bad luck. If you want to generalise, I bet this couple did not spend their money on ‘smashed avocado breakfasts’, or frequent restaurants often.

    Where Greg goes wrong is that this couple have to declare the value of all their assets – car, furniture, lawnmower, tools, kitchenware, linen, underwear, etc. If this puts them over the asset threshold, then they get no pension. If not, they will get some pension, but at least they will get health, electricity, rates, car registration, etc rebates which all counts.

    I think Paul could have been more helpful really. I got my financial advice from my superannuation company – they helped us work it all out including taking into account what we had to draw down from superannuation. Even a visit to a financial consultant at Centrelink really helps too. I did both.

    Our super has gone gangbusters – I know it won’t last forever, but the sharemarket does recover as long as you leave it alone and not fiddle thinking you can outsmart it. Look at history since the 1920s. Before we stopped working (forced to do so early due to illness), I cashed in life insurances, useless managed investment funds, and any cash that was on hand and put it all in superannuation, especially during the GFC. My advice would be to invest in solar power for the house you live in, including a storage battery as well, as they are all cheaper these days. Renovate your house to be comfortable for your old age and any infirm issues. You don’t need to go overboard. A pool is too much work and too expensive to run. An extra bathroom is good if you don’t already have one because once you stop working, you will both be wanting to use it at the same time. These expenses will reduce your assets enough, and solar will save you heaps.

    With no debts, you will be able to live reasonably comfortably on the pension you will be eligible for, and your drawdown. You will be surprised about what you can do on that income. Of course, I assume you will stop working, although you are allowed to earn a small amount each per year without affecting your pension if you are able.

    Then relax and be comfortable.

    • Sheryl,

      Paul himself noted that Jimmy and his wife need to seek financial advice.

      “… this question is too important for a few words here. Please see an adviser.”

      – Money team

    • I disagree, it seems to be you and your generation with the problem and taking cheap shots (play the ball, not the man, please) just highlights this. Nowhere did I say about leaving anything to the next generation(s).

      Case in point – they paid taxes all their lives (yes, and so will Gen X and Y, thank you, and more, keeping the glut of boomers in healthcare and pensions that, like in this case, they don’t need or deserve – just for paying taxes ?! Did you ever use hospitals, roads, schools etc. ? – maybe you should read the article “Sorry boomers, but tying a yellow ribbon round your SUV isn’t sacrifice”.)

      The boomer generation got free university courses, were able to buy land relatively close to the cities before urban sprawl entered the lexicon and take part in demutualisations of Government owned monopolies like the banks…a complete no brainer, really. If they couldn’t make money off that then there’s something wrong. And if you can’t live on nearly 40k a year tax free, with a portfolio growing in excess of inflation, in a house like that, again, there’s something wrong.

      And don’t start with ‘oh, we had interest rates at 19%’ – that’s a furphy, and as a function of the average house price and the average wage, it was much lower (when adjusted for inflation too) than today’s interest rates on today’s wages and today’s house prices.

  4. Paying taxes does not entitle one to the pension. The pension is for those less fortunate. If I had $1.5 million apart from my house, I would be very grateful.

  5. Why even answer a query such as this, they have enough funds to look after themselves, leave the Pension to those who really need it, and the Gov’t will be able to increase the amount of the pension to those in genuine need. Hopefully Money Magazine made up this letter and there was no such greedy couple in actual fact.

    • Hi Rob,

      We don’t make up the questions that are submitted to Paul for advice.

      This is a question Paul gets asked a lot, so he felt it was worth answering for everyone in the same situation.

      – Money team

    • Good Point Rob.

      The reason I stopped being a subscriber to Money Magazine is that it increasingly focused on helping those that don’t need help at the expense of those that do need help. Articles, advice, responses, etc became increasingly focused on those with well above average means instead of being aimed at those with less means who actually need advice and could greatly benefit from it. One only has to look at the level of income and wealth in the letters/advice section etc.

      • Got to agree Steven, it’s either people who are going to retire or stories that I look at and think “yeah, right !”; there was a letter in the front page of last month’s magazine from “Grumpy Old Geezer, NSW” who pointed this out as to a recent letter to Paul.

        I have to say that I find it unbelievable when you have someone write in with a story along the lines of “I’m 22, I’m earning $250k a year, have saved up $600k in cash, have a PPOR valued at $1.5M, superannuation of $750k and no debt etc. etc.”. There was one last month and there’ve been a few in the past 18 months.

        A person like this conveniently leaves out that they’ve had a lot of help from their parents, still live at home, have no kids, received an inheritance and / or had Mummy and Daddy buy you a house or go guarantor etc., because I read some of the stories and think “there is no way that they could have achieved this so fast and so soon without some major help from somewhere”; it’s just not possible. It’s the kind of thing you see on social media.

        (cue the chorus of ‘oh, if you gave up luxuries etc., you’d be like that too’); well, I have and do, and I think that my progress is a whole lot better than a lot of my mates who HAVE had family help.

        Sure, you have your statistical outliers like the entrepreneurs or athletes, but the majority of people – especially young people – aren’t anywhere near this level when they are meant to be “starting out” at that age. They should have more realistic stories, like some of those young people who come here as migrants with nothing (like I did and yet, have been very successful and built substantial wealth by myself) and want to be successful here, or young families.

        The stories would at least be more believable !

        • Hi Mike,

          We acknowledge that we rarely publish letters from low-income earners or people struggling with debt or the cost of living.

          That is because we rarely receive questions from people in those situations.

          If we did, Paul would be more than happy to answer them, so if you know someone who is struggling and in need of advice, encourage them to write in.

          They can email money@bauer-media.com.au.

          – Money team

  6. Hi, I am of the Y generation and I am very disappointed at some of the comments here. This couple have probably worked hard for their money and forgone a lot of luxuries to ensure they have money for their retirement. They just want to ensure they will not be penalised for their hard work and sacrifices. You get penalised for working hard and saving for your entire life.
    Maybe the people complaining should have a good hard look at their finances. Everybody wants the good life without the sacrifices, I see it everyday at work. As my father says ‘stop complaining and do something about it’. There are 24 hours in the day, do whatever it takes to achieve your dreams’. I followed his advice, bought a home and paid it off in metropolitan Sydney(without any financial help) please don’t penalise me for my hard work and wise decisions in the future.

    SG

    • Sally – it’s not about being “penalised”. These people asking the question are basically trying to give up a potential income stream of $40-$50k (they they may indeed have worked hard for) so they can get a pension of $10-$20k.

      If they succeed, your taxes will be higher to pay for their pension, while they retain the ability to pass on wealth (that is in their assets test exempt home) tax free to their family.

      You (being the taxpaying Gen Y) are the loser in all of this.

    • Well Sally, Gen X and Y (as yourself) will have worked just as hard, if not harder for their money, and done without to fund their own retirements. When Gen X and Y retire, there won’t BE a pension because there won’t be enough taxpayers to fund it, and when you do retire after 67 (when the Government actually allow you access to your own money and assuming the age is still the same and it’s not been mandated to be invested into Public-Private Partnerships in the name of ‘building the country’), the goalposts around superannuation will have changed so that your house (that is now worth over a million) is included in the assets test.

      If you want or need the pension, you will essentially be forced to move out from where you’ve lived your whole life, just to realise the capital gain on your own house, so that you have enough money to live on and claim the pension. I sincerely hope that you’re not in that position, but please don’t be blind to the fact that the boomers made the mistake of believing the Government (or the Company they worked 40 years for) will look after you. They won’t, and they don’t have enough money to.

      Everyone just wants to ensure the same, that they don’t get penalised for their hard work and sacrifice, but I think you’ll change your tune in a few years when you realise that your taxes will be funding other people, such as the top heavy section of society as boomers for years to come, because successive Governments haven’t invested in our infrastructure properly (like hospitals) – but the trillion dollar pot of super will be there to secure the grey vote. That’s all that politicians care about – getting elected – and the sheer weight of numbers means the grey vote will get their way.

      Read Kiyosaki – Rich Dad’s Prophecy, and you can see what is happening.

  7. Mike – you weren’t playing the man, calling them greedy – that is personal, not a ball game. And there is the general assumption of your generation that boomers should be forking out for their children to buy houses, because lately the boomers are considered rich and privileged.

    We are 66 and 70, so we lived through the 19% + interest that someone calls a furphy. In fact, for some it went up to 22%. And my birth year was not in the original boomer category until someone changed the dates. Buying a house was as just out of reach in our day with our much lower wages as it is now. We moved to where housing was cheaper but still difficult. We did not get family assistance that is available to you now. After buying the groceries for the week and paying our commitments, there was no more money left to buy an extra loaf of bread. We did not have a house full of new furniture, nor a landscaped garden – that all came gradually with hard work and saving. Actually, apart from appliances, we never bought brand new furniture.

    Our current car is a 2000 model twin cab ute, and we rarely eat out. We have never bought a brand new car. We prefer to save our money for (lately) annual trips to Europe on the cheap (we don’t have relatives or friends there to live off), while our health is good enough to do so. We can do annual trips because we don’t do it extravagantly. No cruises for us.

    And I reiterate, superannuation availability came late in life. Not with the first job like it is now. Your generation will also benefit from increased percentage of superannuation payments. The goalposts of super change for us too, and we have to keep adjusting.

    What’s the “tying a yellow ribbon around the SUV” mean. Another insult? Look at all the SUVs around that are driven by gen X & Y. They seem to be the majority. If they are in hock for it, then don’t buy what you can’t afford. Save it for old age.

    You keep quoting that pensions won’t be available for you, and your house will be considered an asset!!! I take it that you are very young and believe that will happen in your lifetime. Then don’t vote in the political party who is pushing that. Even if this happens, while your house will have a much higher value in the future, then also will be the value of your wages and your super contributions, and your super amount at the end of your working life.

    University was only available in the capital cities. For most of us who lived in regional areas, university (free or not) was out of reach for us because of the cost of living in the city that we would have to pay.

    Stop being bitter about your parents (boomers?) lives and your future. Start being smart with your income as we did. After working for 50 years, I don’t want to live poorly on $39,750. I have done the hard yards, and saved my money, now is the time to enjoy before we die.

    The story that we only need $275,000 and get the full pension was written for those who think they must have a $1m or triple that to retire like financial advisers keep pushing. There is another for a slightly higher amount. The $275k means you still have to work some time to top up to a liveable amount. The story helps people who are stressing about attaining a high level of super (at a late stage in their working life).

    I have read Kiyosaki’s earlier books and found them rather nonsensical for the every day person. Flipping houses before you even pay for them is not the reality for everyday people, and if the market is dead, unrealistic. He is making his fortune by selling his books to gullible people, which we were in the beginning. I have at least 3 of them. Try reading Neal Whittaker for some Australian realism. I also read a book called “How to pay off your house in 3 years” by a mum who did. It takes a lot of physical work though, which I found not practical when one is working full time. Still we could do part of it.

    Brian, the $1.5m included the value of the house they live in.

    Whoever said the government of the time did not make paying taxes a surety for a pension needs to check out the history of the pension. Obviously, way back before your time.

    Jim and wife would need to sell their investment house and put it in super to get an allocated pension. At the moment, their asset is locked up in a house which they cannot sell part of when they need some cash. The cost of repairing and maintaining investment houses is ridiculous, especially after a tenant has trashed it. Not everything is covered by landlord insurance. Besides without an income, there is no availability to write these costs off by taxes. Also, Jim is not eligible for a pension till he turns 65, and the goalposts could very well be changed again regarding assets and income.

    Paul, there are advisors and there are advisors. A bit more clearer direction would have been helpful. I am not saying that you name an advisor which you cannot, but a type would be useful, so they don’t get ripped off. I, too used to subscribe to Money magazine for years since the very first one, but found they became irrelevant when I had worked out what works for us. And being on a part pension, I had to cut expenses.

    Some perspective is needed here – not jealous bitterness. Your turn will come if you be smart and play your cards right.

    • The story Why you only need $275k to retire was inspired by a Money reader.

      For most of his working life there were no super guarantee contributions. To be constantly told that he would need $1 million in super when retirement was just around the corner left him frustrated and disheartened.

      The story was never about giving up on super and relying on the pension.

      In fact, it was quite the opposite – don’t let what may seem like the impossible put you off.

      Effie Zahos
      Editor

  8. Sheryl, it seems it is you who has the issues. The assumption from the boomer generation that everyone else below them can pay for it all….it works both ways.

    I called out the author for what it was – greed – and I stand by that for the reasons I’ve said. If a person tries to arrange assets to make out they have no money and then claim (what is) welfare benefit would be called out as fraud if it was a younger person. I don’t see much difference here.

    Attending university or not was your choice, but the simple fact is, it was free. Costs of living in the city and moving from the country are still around, they’ve not gone away.

    The yellow ribbon reference that you wrongly think is an insult (always looking for the negative, huh ?), is actually a reference to a social commentary by James Quinn (who has a 29 year career, so giving you an idea of his age) called “The Shallowest Generation”. You should read it.

    If the Carnegies and the Vanderbilts had SKI-ed away their fortune, there would be no ‘old money’, yet, this seems to be the first generation that has entertained that concept. My parents won’t and never would do that even if they could because they haven’t got enough money to do so, and I’ve been very successful from my own efforts thank you, so I don’t need your advice and I don’t need their meagre savings….if anything, I help them out (ain’t that novel, just like the Asian countries)…

    “Then don’t vote in the political party who is pushing that.” – easier said than done when by sheer weight of numbers, the politicians will pander to the older generation (fait accompli). King Canute has more chance. And anyone who trusts politicians to deliver on their promises and not change things around as soon as they get elected ?! (superannuation being a great precedent from which to form a reasonable belief that in the next 30 years, the rules regarding access and what is considered in the pension will change. The fact is, there won’t be enough money to go around for everyone, and anyone who drops the pension or raises taxes to pay for it is committing political suicide).

    Good luck putting your faith in any party of whatever colour, I’ve got some old rope if you’re interested.

    QED.

    • Mike, I don’t have issues about it at all but I get sick to death of gen XY slandering the older generation that have made good with what they have. You are the one with the bitter jealous issues and your response reflects that, and you are contradictory in your responses. Why would the older generation vote for a party who would cut/delete their pensions? Your claims are nonsensical.

      Always looking for the negative, huh? That is what you have been doing all the way through from the very first response. Reread your paras.

      Realise this, the so-called ‘boomer’ generation did not have super contributions from day one of their job, like you do. They have to rely on a pension. It was that generation who won the super contributions schemes for your generation. They did not have family assistance, and all round did it tougher than you like to think. Didn’t you learn that from your parents situation?

      Your situation is not everyones, just same as your description of ‘boomers’ is not the same for everyone.

      The Carnegies and Vanderbilts had too much money to spend it all anyway and tight with it. Wasn’t it a Vanderbilt who would not pay the ransom for his grandson’s return from kidnappers? The kidnappers even cut off one of his fingers to prove they had him. Now their wealth is so scattered to numerous descendants, there isn’t much in it. So I don’t think you bringing those families into the picture is a good choice. Look at a more modern billionaire. Bill Gates – he has announced that his children are getting nothing and all his remaining and ever growing wealth is going to charity foundations. He has brought them up and paid for their education, and that’s it. Then it is up to them in this big, bad world to make their own way, even if Kiyosaki’s predictions come true. Don’t forget Kiyosaki is from the US and he is looking at it from their perspective, and with their new president, it could very well happen over there.

      Your misconceptions are extreme. As I said before “Some perspective is required here”.

      The political parties do not pander to the older generation – what nonsense. We are the ones constantly being cut by their decisions just as much as anyone. James Quinn with a 29 year career if he started at 20, is still a babe. Does that make him a Gen X? We are talking about people with 50 year working lives here by people who most often started their working lives at age 14 or less.

      Jim was mislead by that article, and as Effie said it was written to assure that those who were not able to start super early enough to have enough to live on need not be so stressed about it, although all the push from financial advisors is for people to have more than $1m to retire. Now Jim needs assurance that he will be much better off liquidating and putting his money into super to be able to draw down from an allocation fund.

      Otherwise he will end up asset rich and cash poor. To me, his question is so nonsensical, but then he must have been given very poor financial advice, and he needs to talk to the real pension consultants.

      Perhaps, the question was really from a bitter Gen XY to create a stir and generate responses that you have given.

      • Sheryl, do you actually read anything correctly ? I said that the politicians were acutely aware that cutting the pension or raising taxes was political suicide, therefore, they won’t, but the takeaway is, when it comes to my retirement, for this very reason, there’s not going to be a pension.

        You have your own agenda and there are none so blind as those who will not see, and it was YOU who started the personal attacks. Re-read your own posts please and mods, thanks but lock the thread now.

      • Look at Labour’s proposed policy today concerning dividend imputation, which means “no more cash refund from the government if your tax imputation is more than the tax owed that year”. Why ? Because it will save $8b in the budget bottom line.

        My statements about the politicians changing the rules to try and get their hands on your money were right, and I was proved right today from this. Therefore, what do you think the future holds when the government just doesn’t have enough money to go around because the tax base of workers isn’t there ? Answer – more of the same.

        Someone must have voted them in and of whatever colour, they all act the same.

    • No problem Sally.

      Just remember, superannuation is a great tool to build wealth, but ideally, you want assets inside it AND outside of it (because the latter are more under your control) as well. Don’t neglect it, but likewise, I wouldn’t personally bet my house on it (sic), because it’s far too tempting to the pollies to try and get their hands on it, and they’re forever changing the goalposts around it, with more and more grandfather clauses every year, a.k.a. legislative risk.

  9. I’m not taking a dig at anyone’s generation in particular and I’m not saying one group has it better or worse than anyone else.

    Aside from wanting to have similar income each week as they’re used to I don’t understand why the person asking the question to Paul would want the pension to begin with?! It’s next to nothing and anyone in their right mind would rather have a larger passive income with no pension than just scrape in.

    You know what getting a pension means? Poor. I’m sorry but if you have to rely on government assistance it means you don’t have money to look after yourself (are these same people in the “I won’t work overtime/public holidays because it means I have to pay more tax” group? Do they not realise the more tax they pay the more money they are earning?

    Ignore what you could be entitled to and aim to earn more than that!

  10. You know what has been missed here? Jim is one of a couple, therefore the minimum amount of super required for them under this scheme is $400,000, not $275,000. I had read a different version somewhere else where it was stated that it was also necessary to have a job of a few hours now and then to top up. An unlikely possibility post 65.

    All the more reason to think that the question was asked by someone who wanted to stir up Gen X&Y.

    Greg is only one to grasp it.

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