Funding your lifestyle after retirement
For those of us that are approaching retirement, the number of decisions that need to be considered can be a little overwhelming. While some of us have well laid plains, for the majority we need to consider what life looks like when we retire and no longer have an active income from employment.
Once retired, your lifestyle will be determined by your reliance on passive income from investments or government welfare.
The decision making will be personal and influence by your individual circumstances including age, health, and emotional desires. However, your financial position is likely to be the most influential consideration when determining your lifestyle for the future.
With most Australians having their wealth held within the family home, retirement may require them to sell up and move into alternate accommodation.
There are many types of accommodation that specifically cater for retirees, including:
- Over 50s/60s lifestyle communities: gated residence with homes, 24/7 security, independent living and shares common facilities with onsite management (read benefits of MHEs)
- Over 55 housing: generally, in the form of townhouse or apartment accommodation
- Retirement villages: one of the most common form of retirement living that can take on many forms of accommodation, including:
- Smaller freestanding homes supported by a common area that facilitates community engagement
- Independent living apartments support by common area facilities
- Integrated villages that include independent living apartments, together with assisted living apartments and aged care facilities that support the aging process
- Aged care / nursing homes: that provide support later in life when our dependence on health care increases
With each type of accommodation there are also different tenure and ownership models.
Some accommodation types allow both rental and purchase options, while other types only allow one or the other. For example, nursing homes are only provided on a rental/fee for service model or Over 50s lifestyle villages home owners purchase the house from the owner but lease the land upon which their home is located at a weekly site fee, which includes all onsite amenities, security and management (read more on MHEs).
For those who can purchase, they may choose a different tenure basis including license, leasehold or freehold purchase and have the various funding models.
However, what happens if:
- You are overwhelmed with the options available and unsure what the future may hold
- Your family home still caters for your current lifestyle
- Your are emotionally connected to your family home
- You require additional cashflow to support your lifestyle
You may then have to consider tapping into your home equity while continuing to live in your family home.
A reverse mortgage (or home equity release) may allow you to achieve this objective, or similarly a Pensions Loan Scheme (PLS). These options vary depending on your needs and preferences.
Reverse Mortgage (home equity release)
A reverse mortgage (home equity release) can let you access some of the equity in your home through regular monthly repayments (or a lump sum) to yourself from the lender. These payments may then be utilised to fund your ongoing lifestyle while you remain in the comfort of your home.
A reverse mortgage (home equity release) will:
- Not require you to make repayments, instead, interest will be charged on top of the loan
- Generally only require repayment when you either move out, sell your home or pass away
- Allow you to continue to benefit from potential capital gains and increased equity in your family home’s value
Pensions Loan Scheme (PLS)
The PLS operates like a reverse mortgage. It suits older Australians who are asset-rich but income-poor. Unlike a conventional reverse mortgage, pensioners cannot borrow a lump sum; instead, it is paid on a fortnightly basis.
Under the PLS, recipients can supplement their fortnightly pension up to a maximum of 150 percent of the fortnightly Age Pensions rate, including pension and energy supplements and any rental assistance.
For example, if you are a couple and receive a combined fortnightly pension of $1,407, you would be able to receive a combined additional payment of up to $703 per fortnight as PLS payment. The PLS will continue to be payable until the recipient reaches their maximum loan amount.
The maximum loan depends upon your age when you apply for a loan, the value of your property, and how much equity you would like to retain in your home. Learn more on the Pensions Loan Scheme (PLS) on our blog article, Pensions Loan Scheme for older Australians who are asset-rich but income-poor.
Some people (and their children) worry about the potential loss of the family home. While, as with any loan, this is a possibility, lenders will allow only a small percent of the home equity to be released to minimise the chance of this occurring.
For example, at age 60 you can usually borrow between 15% – 20% of the value of your home, with increases of 1% for each year you are over 60.
There are many pros and cons of using reverse mortgage (an equity release) and a PLS that need to be considered.
As everyone’s circumstances are unique, it is important o see a financial expert’s advice when considering this option to ensure an informed decision is made. Finance specialists can assist in navigating the various scenarios and together can help you make the right retirement decisions to suit your situation and preferred retirement lifestyle.
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