Awareness about planning for retirement income these days is perhaps greater than ever. We are constantly reminded by Government and media about the growing burden of the age pension and the increase in life expectancies. The need to self-fund retirement is therefore becoming increasingly important.
Of course the ideal situation is to plan ahead for retirement as early as possible and as thoroughly as possible. That means projecting what your spending needs will be in retirement, including:
- your everyday expenses, such as food, utilities, transport and clothing
- your lifestyle costs, such as sports, hobbies and the occasional holiday
- capital expenses to fund major one-off purchases, such as cars and home repairs, and
- a contingency fund for emergencies.
The reality, however, is that some of us may leave our run too late or may not be able to put aside as much for retirement as we would like. Even those who do plan carefully and save faithfully for retirement may be hit with unpredictable costs that they did not identify in their planning.
What can create extra expenses?
Additional expenses in retirement may occur for a variety of reasons. It may be an invitation from some friends to join them on an overseas trip. Or perhaps you decide you want to add an indoor/outdoor room to the house for family entertaining. It could even be a desire to help out children or grandchildren with the purchase or a car, or assistance with a home deposit or school fees. Your budget may not allow for such major expenditure, but there may be other options if such objectives are important to you.
A limited return to work
It may not be for everybody, but a limited return to some sort of paid employment may be an option to start funding a special goal. This can be an attractive option if you have been missing the mental stimulation and social aspects of the work environment, so perhaps some part time or contract work for an old employer or client may be worth pursuing.
Alternately, it could be a completely different field to your previous employment, such as a local retail store, school or club. You may only need to do a short stint or two, or maybe allocate a day or two a week – whatever suits your retired lifestyle.
Start a hobby business
If you don’t want to return to working for someone else, why not turn one of your personal hobbies or interests into an income earning opportunity? If you enjoy gardening, for example, why not offer your services in the local neighbourhood and earn some ready cash doing something you love. This has the advantage of letting you control the amount of work you take on and when you do it.
Local markets and car boot sales may be an option for selling some of your handiwork, such as woodwork, jewellery, garden produce or baked goods. The same venues can also be good places to make some cash from the unused items you have cluttering up the house or garage.
Join the sharing economy
You can put your assets to work by joining the growing number of people who take part in the sharing economy. Perhaps your home is big enough to start up a bed and breakfast or rent out a room on a more permanent basis. You could also make use of your car by becoming an Uber driver, which allows you to set your own hours and discriminate on which customers you choose.
Even if we plan well for retirement, unforeseen expenses may put pressure on income, but there may be options to find extra cash
Accessing home equity
If earning income doesn’t particularly grab you, the other alternative is to look at ways of accessing some of the value of your home. If your home is actually bigger than what you need, then perhaps down-sizing is an option. You end up with a more manageable residence with lower maintenance costs and you free up some of the capital that has been locked in your home, which you can then use for lifestyle objectives.
If selling the home is not desirable, but you still want to access some of your equity, a reverse mortgage may be an option. A reverse mortgage is basically a loan from a financial institution that is made against the value of your home equity. Unlike a normal mortgage, a reverse mortgage gives you the option not to make repayments and let interest accrue instead.
While a reverse mortgage may assist cashflow in the short term, you need to bear in mind that the compounding interest may quickly build up and eat into your equity. When you eventually come to sell the home you may end up with a nasty surprise in the amount that the financial institution will need to be paid back out of the sale proceeds.
Entering such arrangements needs to be done with caution, a clear goal in mind and a careful analysis of how it will impact your future income and estate plans. You need to determine whether you will be able to pay back interest out of your other income, or alternately whether you are prepared to sacrifice a sizeable chunk of your equity when the home is eventually sold, in order to pay back the loan. A reverse mortgage may also impact your pension entitlements.
To help assess the risks and whether a reverse mortgage is suitable for your needs, it is best to get some professional advice to help you weigh up the pros and cons.
Pension Loans Scheme
An alternative to a reverse mortgage, which may be more suitable if your needs are relatively modest, is the Pension Loan Scheme provided through the Department of Human Services and the Department of Veterans' Affairs. This scheme may provide you with a top-up to your basic pension amount in the form of a loan with an economical interest rate.
Planning is the key
Whether you are still saving for retirement or are already in retirement, planning and seeking competent advice is integral to ensuring you maximise retirement income. A financial planner can help you assess your lifestyle priorities, retirement goals, current financial situation and social security entitlements, so that you can develop a clear strategy that puts it all together.
What ideas can you share for boosting retirement income? Let us know below.