A Retirement Dilemma

I recently came across a couple, let’s call them Jack and Jan, who were faced with a dilemma as they both approach retirement. Unfortunately their situation is all too common.

Jack is 63, and Jan is 61. They are the first of the baby-boomer generation.

Both Jack and Jan are working full-time. Jack is a bus driver and earns just over $50,000 a year, and Jan works in an administrative capacity and earns a similar level of income.  They have $160,000 in superannuation between them, have two relatively new cars (owned outright) and have a modest amount in the bank ($5,000). They have no other investments.  They have a house valued at $600,000 but, on the downside, their mortgage is still sitting at $130,000.

They had planned to retire when Jack turns 65 and hoped to move to a coastal community around one and a half hours from their State capital so as to be close to family, medical facilities etc. 

As things currently stand, Jack and Jan have a comfortable lifestyle. Their income needs, including mortgage repayments, consume all but $10,000 of their combined net income.  In retirement they are hoping to generate a combined income of around $50,000 after tax in today’s dollars.

After a first ever visit to a financial planner, they have come to the realisation that they have very little hope of achieving their retirement dream and have embarked on a major rethink.

Amongst other things, retirement has now been deferred another five years. With some ‘belt tightening’ around the family budget, this may allow them to have the mortgage paid off by the time Jack turns 68.  Jack, who has the bulk of the super, will be commencing a pension under the transition to retirement rules which will increase the tax effectiveness of his income, resulting in an increase in his projected super account.

Once Jack and Jan sell their family home, they expect to have to spend a similar amount on a house in their dream location so it is unlikely any surplus will be available for generating retirement income.

The final realisation for Jack and Jan is that it is unlikely their current super savings, combined with the age pension, will be sufficient to allow them to generate the level of income they desire in retirement.

Jack and Jan are now aware of their dilemma but armed with new resolve, have agreed to prune their family budget and look for all possible opportunities to save for their retirement.

Their biggest regret is they did not see a financial planner earlier who could have worked with them over a longer period of time to ensure they had a much higher likelihood of achieving their retirement goals without having to resort to deferring their retirement.  

Many baby-boomers are confronted with a situation similar to Jack and Jan’s. Early intervention in the retirement planning process, coupled with quality financial planning advice will go a long way towards alleviating the dilemma Jack and Jan are faced with. 

Source | Martin Horner | Professional Investment Services