Retiring carefree: There's some tough decisions to be made in regards to superannuation and other savings before you can take off in your motorhome or caravan.

Retiring carefree: There are some tough decisions to be made in regards to superannuation and other savings before you can take off in your motorhome or caravan.

The idea of leaving the workforce and travelling the country in a Winnebago or spending more time with the grandchildren might sound like heaven on the proverbial stick, but there is a lot to think about and some potentially difficult decisions to make.

But first, the good news. Some 80 per cent of Australians over the age of 60 are eligible for a full or part-government pension. Even better, the eligibility criteria are quite generous.

There are two tests for the age or government pension – an income test and an assets test. For most people, it is the assets test that counts. A couple who own their home can receive a full pension if they have less than $279,000 in assets, excluding their house.

It is interesting to note here that your partner’s assets will be taken into account in determining how much age pension you will receive, apart from their super, assuming they are still accumulating super savings.

The threshold for the full pension in the case of a single person who owns their home is $196,750.

Couples who own their home and have less than $1,126,500 of assets, again excluding their house, can still receive a part age pension – complete with all the benefits that come with the pensioner concession card. The threshold for a single person is $758,750.

After this, it starts to get tricky.

Thanks to Australia’s compulsory superannuation system, which currently forces us to put 9.25 per cent of our salary into a retirement fund, most individuals will also retire with super savings, which can be withdrawn tax-free from the age of 60.  

It is these savings – as well as any savings that are held outside super – that require some attention.

The idea is that these savings will supplement your living standard in retirement.

Financial advisers argue that a pot of less than $50,000 is insufficient to augment a lifestyle, in which case withdrawing the money and blowing it on a good holiday or a new car might be in order.

But if you have more than this amount, it is advisable to invest it so you can draw an income – and enjoy extra meals out or buy more presents for the grandchildren a long way into the future.

Decisions taken here are critical, as they could affect your lifestyle over the long term.

“These decisions can affect you for the next 20 years,” says Justin Bott of the financial information service at the Department of Human Services.

Investing badly, or investing without taking into account your appetite for risk, could result in sleepless nights – hardly the stuff of an easygoing retirement.

It can be a daunting time. For many people, retirement is the first time they get access to a big wad of cash. Knowing what to do with it does not come easily.

Bott says that one of the first questions he asks would-be retirees is about their appetite for risk. Some people can’t bear the thought of losing their capital and want to put all their money in the bank. It might not be a great move from an investment point of view, as the value of cash is eroded over time by inflation, but it is a safe option.

Most financial advisers recommend having a mix of risky assets, such as shares, and low risk investments, such as cash and bonds, to create a portfolio that should rise in value over time but will still help protect the retiree from market downturns.

The next thing to consider is whether to put your money in an account-based pension, a private pension inside the super system, or invest your money outside super.

There is a raft of things to consider. But remember, says Bott, no decision taken here will impact your eligibility for the pension, so on that note at least you can rest easy.

The advantage of an account-based pension is that it is tax-free, regardless of the account balance or the income it generates. You can stipulate how much you would like the provider to pay you each month, although there are rules about the minimum amount you must withdraw each year.

Most super funds, though not all, offer account-based pensions.

Alternatively, you could leave your money outside super – and it might be tax-free in any case.

Seniors over the age of 60 are eligible for a seniors and pensioners tax offset (wonderfully dubbed SAPTO), which means that a couple can earn up to $58,000 tax-free, while a single can earn $32,300 tax-free.

One of the potential disadvantages of having shares or share funds outside super is that dividends and managed fund distributions can be lumpy because they are linked to the performance of a company, says Bott. On the other hand, a pension fund can be directed to pay you a regular income.

But Mark Draper of GEM Capital argues this is a furphy. Dividends, he says, tend to be reasonably stable from one year to the next. Furthermore, dividends and distributions can be directed to a cash management account, which could then automatically pay a set amount into your bank account every week or every month.

Sam Henderson, of advice firm Henderson Maxwell, recommends retirees put the bulk of their savings into an account-based pension. Capital gains are also tax-free inside a private pension, he notes, but above a certain threshold, they will attract tax if made outside super.

“There is no formula for the amount, but I would leave between $50,000 and $300,000 outside super," says Henderson. "I call it an emergency buffer. It could be used if you want to do up your kitchen or bathroom.”

Draper is more sceptical about the government’s policies on super. He argues that retirees should consider leaving half of their savings outside super as a precaution in case the government changes the super rules.

“I think you have regulatory risk. I disregard the argument that legislation will always be grandfathered,” says Draper.

“It is clear this government will look at the super system.”