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Retirement

Retirement trap hurting saving Aussies

  • January 24 2020
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Retirement

Retirement trap hurting saving Aussies

By Cameron Micallef
January 24 2020

Australians are being warned that they will need half a million dollars to escape the “retirement trap” of a reduced pension due to assets meeting certain thresholds, according to an industry expert.

Retirement trap hurting saving Aussies

Retirement trap hurting saving Aussies

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  • January 24 2020
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Australians are being warned that they will need half a million dollars to escape the “retirement trap” of a reduced pension due to assets meeting certain thresholds, according to an industry expert.

Retirement trap hurting saving Aussies

According to BetaShares, retirees who lift their savings to between $350,000- $600,000 may ironically see their income diminish.

BetaShares senior investment specialist Dr Roger Cohen said, “Common wisdom tells us that accumulating more savings through our working lives should result in higher income in our retirement years.” 

“However, our analysis shows that, for certain people, under the current system, accumulating more money can actually produce the reverse.”

The current retirement system in Australia sees retirees drawing income from a combination of superannuation, the Age Pension and external assets. 

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The pension is means-tested, with the level of entitlement calculated using an income test and an assets test. These entitlement levels and associated reduction in the pensions are the primary drivers behind the “trap”.

More specifically, for an individual, there is an income range between $174 and $2,026 per fortnight, where for every additional dollar earned, the pension is reduced by 50 cents. This effectively halves the value of additional earnings for retirees in this range.

“For a retiree caught in the ‘retirement trap’, additional assets are better off spent, or, if they are invested, must generate returns that are well in excess of 7.8 per cent per annum to exceed the pension entitlements that are lost, Dr Cohen said.

“Unfortunately, such investments generally entail taking risk above levels, which are commonly recommended for retirees.”

“The transition from full entitlements to the Age Pension to no entitlements needs to be smoother. It is certainly an undesirable situation that for some people, more is not necessarily more,” he added.

“Without considering the eventual policy changes from the Retirement Income Review, our research shows that people in retirement can only escape the ‘retirement trap’ if they accumulate an asset base well over half a million dollars.”

nestegg has previously reported how Australia could be heading for a retirement crisis.

Retirement trap hurting saving Aussies
Retirement trap hurting saving Aussies
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About the author

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Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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