When The Money Runs Short !

Many of our self funded retirees are in trouble.  They are the people who took their superannuation in a lump sum and probably paid a registered financial adviser to plan how and where to invest it to gain a regular income to fund their retirement.

The choices available were wide and varied.  Some put their money into term deposits when interest hovered around five percent, but the Reserve bank has consistently cut interest rates and they are now close to zero.

Some played the share market in the expectation of healthy dividends from the banks and major companies, but the coronavirus lockdown decimated profits  and those dividends have either fallen sharply or totally disappeared.  Selling those shares in a falling market will result in a loss of working capital.

Some hedged their bets by investing in real estate.  The price of houses seemed to be ever rising and it looked a safe bet to own property that brings in weekly rental money.  Then this coronavirus threw a lot of people out of work and the government imposed an eviction freeze.  An improvement is likely, but a lot of landlords are seriously out of pocket and rents are still falling.

The government has gone into record deficit to shield those out of work because of the virus lockdown and many of their employers are kept from the bankruptcy court by government aid, but nothing is being offered to self funded retirees.  Their carefully planned sources of income are being choked off and it seems likely that eventually many will be forced to apply for the aged pension.  That is exactly what the government sought to avoid when it legislated for compulsory superannuation for all.

Now the Assistant Minister for Superannuation is suggesting that self funded retirees turn to the equity in their homes as an income supplicant.  This is something those in the financial market describe as a " reverse mortgage ".

When you fully own the house you live in it is possible to ask the bank to advance money that you do not need to repay until the debt is settled by your executor after your death.  You have money to live on by clawing back those mortgage payments you made to finally own the house at the expense of what you expected to leave for your children to inherit.

That is not as simple as it sounds.  Interest will apply to that money borrowed and while the rate at present is abnormally low we should remember several decades ago when it rose to seventeen percent.  It seems certain that interest rates will eventually rise and eat away the equity you have in that former fully owned home.

A retiree finding insufficient income to pay living expenses would be better advised to sell other assets and suffer the loss of capital rather than take an open ended loan on their primary home.  That loss of capital will further erode the value of their assets and bring them into contention for a part aged pension. The aged pension is applicable to an assets test but this is not granted automatically.  Many self funded retirees were ineligible for the pension at retirement, but qualify for a part aged pension under their present circumstances.

Those suffering an income loss would be well advised to get professional help.  Rushing into a reverse mortgage solution is akin to sailing into a minefield in blissful ignorance.