10 common money mistakes to avoid in retirement
Retire “richer” by avoiding these key mistakes
In the next five years, Australia is on the brink of experiencing significant demographic and financial shifts. With an estimated five million retirees, a collective superannuation pool of up to $5 trillion, and an annual wealth transfer of over $200 billion to younger generations through inheritances, it’s a pivotal juncture for retirees and their financial futures.
However, within this wealth transition, several mistakes are occurring in areas like taxes, pensions, wills, and financial advice. These errors have the potential to cost retirees tens or even hundreds of thousands of dollars.
AMP says more than 670,000 Australians intend to retire by 2028, and warns a lack of confidence around retirement savings and strategies means many are spending frugally and not enjoying the lifestyles they can afford.
Its recent research found 60 per cent of older Australians wish they had started planning earlier, and three quarters find the retirement system complex.
AMP head of technical services John Perri said sometimes the wrong decision was made by not doing anything at all.
“I’m worried about people getting information from friends of friends, or people down the pub. People don’t know what they don’t know, and they’re making some major life decisions,” he said.
These money mistakes can potentially turn golden years into an unpleasant shade of brown.
Giving away significant sums of money without proper planning can have severe consequences on pension asset tests. Retirees should be aware of the strict gifting rules, such as the five-year lookback period, to avoid unexpected pension reductions and potentially undoable financial transactions.
Paying Excessive Taxes
The tax implications of superannuation can be bewildering for many retirees. Some neglect to transition from the accumulation phase to an account-based pension, missing the opportunity to enjoy tax-free income, capital gains, and withdrawals. These tax savings can significantly boost their retirement finances.
Leaving Everything to a Spouse
While it may seem natural to leave assets to a surviving spouse, this can sometimes lead to unintended consequences. Assets passed to the surviving spouse can put them over Centrelink asset test limits, potentially eliminating their age pension. Careful estate planning is necessary to ensure assets are distributed wisely and according to the retiree’s wishes.
Misunderstanding Income Products
New retirement income products, such as annuity-style options, offer retirees a way to secure their finances and reduce the fear of running out of money in retirement. These products, when linked to the Consumer Price Index, can provide more financial stability. Understanding how these products work and how they impact pension eligibility is essential for retirees to make informed decisions.
Property Investment with Children
The desire to assist children with property purchases is common among retirees. However, many may not realize that this can inadvertently push them over the assets test limit for age pensions. This can result in significant reductions in pension income and the need for strategic financial planning.
Being Overly Frugal
Many retirees approach their golden years with excessive caution, fearing they might outlive their savings. This results in unnecessary frugality, preventing them from enjoying the retirement they’ve worked so hard for. A more balanced approach is needed, where retirees recognize that their retirement income can come from various sources, including superannuation pensions and age pensions.
Inaccurate Asset Valuations
When assessing assets for pension eligibility, many retirees overestimate the values of their possessions, such as cars, caravans, and household items. This overvaluation reduces their entitlement to government benefits. It’s essential to ensure that asset valuations align with the second-hand market value, not the replacement or insurance value.
Failure to Discuss Financial Matters
Openly discussing financial matters, especially those related to inheritance, estate planning, and retirement income, is crucial. Avoiding these conversations can lead to confusion and disputes among family members and beneficiaries. Seek professional advice and educate oneself through resources like Moneysmart.gov.au and ServicesAustralia.gov.au.
Downsizing a family home can be tempting, with potential superannuation incentives. However, retirees need to consider the impact on their age pension. While the family home is exempt from Centrelink’s asset test, the released equity from downsizing may count as assessable assets.
Retirees often continue paying hefty life insurance premiums when their mortgages are paid off and their children have left home. This can erode their retirement savings needlessly. Additionally, they may overlook the need to review general insurance policies, potentially underinsuring their belongings and exposing themselves to financial risk.
Understanding these ten common financial missteps and taking proactive steps to avoid them can help Australian retirees enjoy a financially secure and fulfilling retirement. It’s crucial to seek professional advice and stay informed to make the most of their retirement years.