What the federal Budget does – and lacks – for retirees
For Aussies currently saving for retirement, unpicking the Budget suggests a case of short-term gains but long-term pain.
While the Budget included some soft support on the cost of living, it was very clearly an election budget – lots of short-term sweeteners that do little to address the underlying financial cavities.
Here’s what it all means for retirees.
Pension numbers don’t add up
The ASFA Retirement Standard – used as a guide by the government’s MoneySmart website – states couples need at least $41,929 p.a. for a modest retirement; $64,771 for a comfortable one. Yet the maximum aged pension – including supplements – is only $38,708.80. A $3,220.20 shortfall.
For singles, that gap is even worse. Income of $29,139 will fund a modest retirement; $45,962 a comfortable one. The maximum pension? Just $25,677.60 – $3,461.40 below the minimum needed.
In that context, it’s difficult to see the value of the one-off $250 bonus for pensioners. That buys, for example, $20 in fuel each week for 3 months. And even with the temporary fuel excise cut, $20 doesn’t buy much.
Tricky tax offsets
In theory, offsets like the Low and Middle Income Tax Offset (LMITO) sound like a win. However, they aren’t so clear-cut.
Think back to the last tranche of income tax offsets – lots of hype beforehand, but hardly anyone noticed a difference in their bank account.
Politicians like to use big numbers, but they’re usually referencing the total saving over the forward estimates – or next 4 years – not necessarily what you will see this year.
Incomes also change year-to-year, potentially shifting your tax bracket and hence your eligibility.
Plus, you won’t see this latest offset until you lodge the current year’s tax return – at least 3 months from now.
Breaking or making barriers?
Some Budget measures sought to address issues inhibiting self-funded retirement – a great first step. What they lacked, though, was structural reform.
Funding to support women escape domestic violence is a great example. Too many women face the choice between a life of poverty for themselves and their children if they flee, or a life of violence and the threat of death.
But where exactly does that funding go? How many homes will it deliver? What programmes will it support? Are funds properly distributed between immediate support for vulnerable women and prevention strategies to stop violence occurring in the first place, such as education and mental health services?
Similarly housing affordability support. For years, we have been warned of far-reaching impacts from unaffordable housing and declining home ownership rates:
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More people retiring with a mortgage and burning superannuation to pay it off.
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More retirees renting – constraining rental supply, inhibiting housing stability and restricting
necessary home modifications.
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Delayed wealth accrual for younger people.
However, the Budget assistance for first home buyers and aspiring regional buyers who have not owned property within the past 5 years has stoked fears of further inflating house prices.
Meanwhile independent financial advisers are disgruntled by the effects of industry regulation – soaring compliance costs are ballooning the price of professional advice, limiting access for lower income earners
Maximising retirement savings
But, it’s important to work with what we have.
One positive change for pre-retirees actually introduced in last year’s Budget – which takes effect from 1 July this year – relates to downsizer super contributions. This little-known rule enables older people to contribute up to $300,000 ($600,000 per couple) from the proceeds of selling their home into super, without affecting contribution caps.
The change will see the eligibility age reduced from 65 to 60 – enabling more Aussies to boost their super and enjoy the associated tax benefits when downsizing.
Other great news is the ability to contribute to superannuation way beyond current ages and without meeting a work test. Make sure you seek advice.
Meanwhile, even short-term windfalls can be invested wisely – whether in the form of lower taxes, cash grants or simply cheaper fuel. The trick is to have a solid household savings and investments plan, to identify these funds and separate them from everyday expenditure.
While interest rates remain low, now is a good time to pay down debt – a great use for tax returns.
Of course, with a federal election due by 21 May, remember that some Budget measures may never eventuate – the new government will be free to make their own changes or start over.
So, by all means consider the Budget and its possible impacts on your bottom line. But don’t pin your whole retirement on its every detail. Focus on the big picture, get qualified advice, have a plan, and build in contingencies. Otherwise, there may be nothing left with which to fill any nasty cavities!
Helen Baker is a licenced Australian financial adviser and author of two books: On Your Own Two Feet – Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce – Your Survive and Thrive Financial Guide. Proceeds from the books’ sales are donated to charities supporting disadvantaged women. Helen is among the 1% of financial planners who hold a master’s degree in the field. Find out more at www.onyourowntwofeet.com.au
Note this is general advice only and you should seek advice specific to your circumstances.