Recently Jane, a widow aged 68, sought our advice on her retirement cash flow. (Not an actual client, of course, but typical of situations I see regularly in the course of my work).
She had a home debt free home worth $650,000, she receives living alone National super of $18,200 nett, and she has $250,000 in the bank.
Since her husband passed away, she had fairly quickly worked out that she needs an extra $1500 per month over and above National superannuation to maintain a reasonably comfortable lifestyle and pay all her bills.
At times she feels a trip or cruise would be good. In addition she has found that there are always extra expenses, which seem to be never ending.
Jane was concerned that she was slowly but surely using up her capital at about $10,000 pa. , since bank interest falls well short of her needs.
In terms of her assets (a property worth $650,000 and investments of $250,000) Jane is actually reasonably well off.
Her situation is quite common too, with about 75% of her money tied up in non-income producing assets, and only 25% in assets producing income.
Her investments would need to earn over 7% after tax and fees to maintain the $1500 per month that she needs. A diversified portfolio of 65% bonds, 10% property, and 25% shares would be more likely to produce 5% to 6% pa. nett. Better than the bank, but even on this basis her capital will continue to decrease by about $5000 pa. Her income needs to increase annually too to keep up with inflation and an ever rising cost of living.
We used a retirement decumulation calculator based on;
- 5% nett return
- $1500 per month draw down
- Increasing by 3% per annum to counter inflation
It shows Jane’s $250,000 will in theory run out after 16.4 years. However probably more like 13 to 15 years, as she will no doubt have extra costs e.g. vehicle replacement, new roof, medical bills.
Obviously her fallback position is her property worth $650,000 and some of the options she has are;
- subdivide her property if possible
- downsize her property when she gets older – people often do around age 80 to 85
- reverse mortgage her property – not recommended except as a last resort, not until she is well into her 80s, and not without at least two sources of good advice
- when her cash runs low, look into gradually “selling her house” to her children by way of monthly payments from them to her. This will increase her income and at the same time guarantee that they will inherit her house (a lot better for them in terms of inheritance than if she reverse mortgages the house). However it will need a carefully drawn up agreement, and good record keeping.
No doubt there are other options that she/we may not have thought of, which may emerge when the time comes.
However the key points are;
- she has plenty of time and some options
- she has some peace of mind from having sought advice, and knowing what some of her options are