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Managing credit for retirement

Every penny counts

Retirement is a time when good money management is vital. Without the benefit of a regular pay cheque, careful planning and commitment are essential to stay on track financially. The earlier you start saving and making plans for your retirement, the easier the transition out of the workforce will be.

Having spent decades building up your financial position, the decisions made at this stage of your life are critical. Many of us can expect to spend twenty years or more in retirement. And one of the challenges retirees face, is living on a fixed income where every penny counts.

Rising prices, commonly known as inflation, will eat away at your nest egg, so plan to put your money in a combination of investment options, including growth-generating products.

Get professional advice

When you are part of the workforce, mistakes are of a lesser importance as you have a chance to recoup any lost funds. But once full-time work stops and you are relying on your assets, it is important to have your investment and tax strategies spot on. That makes good financial planning advice is a must. Look for a competent adviser whom you trust and feel comfortable with, but be sure you understand the strategy being proposed for your investments, the risk involved and the potential returns you can expect.

Budget for retirement

Budgeting is critical in retirement. It is likely you will be living off a fixed income, and overspending can mean eating into your retirement nest egg – savings that are not easily replaced.

List your living expenses for each month, then see where you could cut back. Once you know how you spend, make certain your income will cover these costs.

Try drawing up a retirement budget and sticking with it even before you retire. That way it won’t be such a big change when your working days are over. Any savings you make can be added to your nest egg.

Your budget will probably need to be revisited regularly – especially in the early days when you are new to retirement. Remember also that our spending habits change as we age. The early to middle years of retirement are when we tend to spend more on recreation – something that should be factored into your budget.

Check your entitlements

Check your social security entitlements with Centrelink. Being eligible for even a part-pension - as low as $1 a week, could see you qualify for valuable benefits including:

Make use of discounts available to pensioners or Seniors Card holders (log onto www.seniorscard.com.au for more information).

Reduce debt before you retire

No one wants to spend their golden years struggling with debt, so aim to pay off existing credit before your working days are over. Every dollar you pay in interest is money you could be living on in retirement, so it pays to be extra cautious with debt in the pre- and post- retirement years.

Debt reduction tips for seniors

For older Australians living on fixed incomes it can be hard making ends meet. Credit - especially credit cards, can be useful in an emergency, but unless you are careful it can lead to overspending, creating a spiral of debt that can be hard to escape.

Many of the debt-management options available to younger people - like getting a second job to pay off the debt faster, don't make sense for retirees.

But that doesn't mean you can't take action. There is still a range of strategies retirees can use to dig themselves out of debt. You may be able to:

• Access your home equity
• Work for longer
• Consider a 'transition to retirement' pension
• Withdraw a lump sum from super
• Enquire about Centrelink's Pension Loans Scheme

Access your home equity

The family home remains the single most important asset for many over-55s. Trouble is, our homes lock up large amounts of capital, which would be vary handy in retirement. But there are ways to unlock this capital, without the need to sell up or move out of a much-loved property.

Reverse mortgages

A type of credit called a 'reverse mortgage' - or 'senior equity release' loan, lets retirees tap into their home equity. Lenders advance a proportion of the property's value in either a lump sum or regular payments, providing cash that can be used to pay for a holiday, repay outstanding debt (like credit cards) or help meet daily living expenses.

The loan, plus accrued interest, is repaid either out of the estate or from sale proceeds if the property is sold.

Reverse mortgages do have some downsides. Notably, the growing debt can outpace increases in your home's value. For example, a loan of $100,000 at an annual interest rate of 7.5%p.a., will grow to $206,100 in ten years, rising to $424,800 in twenty years (Source: ASIC). The debt may be offset by rising property values but there is no guarantee of this.

A reverse mortgage may affect your pension entitlements. If, for example, you are advanced a large sum of $40,000 or more, and the funds aren't spent immediately, the money may be regarded as an asset and be subject to deeming rules.

Also, a reverse mortgage will affect the size of your estate, so it is something to discuss with your beneficiaries.

Work for longer

Not everyone wants to keep working, but delaying retirement - or heading back to work part-time, can bring in much-needed cash.

A sweetener for working beyond pension age is the government's Pension Bonus Scheme. This is a tax-free, lump sum bonus, designed to encourage older Australians to extend their time in the workforce.

To receive the bonus, you need to register with Centrelink, and then continue working 960 hours in a year, for at least 12 months. For more information log onto http://www.centrelink.gov.au.

Consider a 'transition to retirement' pension

For the over-55s, there is a way to access your super savings while still supplementing your income from part-time work. By using a type of private pension known as a 'transition to retirement pension' (or TRAP), it is possible to draw down your super gradually. This lets you work part-time and still pay the bills.

The trade-off for accessing your super before you fully retire, is that TRAPs cannot be commuted - meaning the money cannot be taken as a lump sum until you reach age 65 or retire altogether. Additionally, you cannot access more than 10% of your super balance this way in any one year.

Be aware too, accessing your super early could have a significant impact on your retirement lifestyle later on.

On the plus side, a TRAP can let you work longer, which in turn could make you eligible for Centrelink's Bonus Scheme.

Withdraw a lump sum from super

Taking your super as a lump sum can be a good idea f you have substantial debts to pay off. And from age 60, any payouts from your fund will be tax free.

However it pays to think carefully about dipping into your super to extract large sums of cash. This money is designed to support you throughout your retirement, and eating into it too much in the early years could leave you short of cash in the future.

Enquire about Centrelink's Pension Loans Scheme

If you don't qualify for a full pension, you may be eligible for Centrelink's Pension Loans Scheme. It works in much the same way as a reverse mortgage. Equity in the family home or an investment property is used as security for the loan, which, along with interest, is eventually recovered from your estate.

Log onto http://www.centrelink.gov.au for more information.

Credit tips for retirees

• Be sure to let your bank know you have retired. You should be offered a no- or low-fee account.
• Mention you are a senior when shopping – you’ll be surprised how frequently you will be offered a discount!
• Be wary of acting as guarantor for the debts of adult children. If anything goes wrong you could lose everything you have.
• Under the Consumer Credit Code, you may have the right to reduce your credit repayments or spread them out over the longer term if you are facing temporary financial hardship.