What if you're still renting at 65?
Couples who rent in retirement will need more than $1.1 million in assets, half a million more than debt-free homeowners, according to the latest research from the Association of Superannuation Funds of Australia (ASFA).
This larger super balance can be planned for in the accumulation stage and, without the burden of mortgage repayments, it is entirely possible for non-homeowners to accumulate more in super than homeowners.
However, the age pension rules favour homeowners, so it is important to consider the lifestyle benefits against the financial cost of continuing to rent.
If a 65-year-old couple did not own a home but did have $1 million of investment wealth, should they consider purchasing a property or continue renting?
If they decided to purchase a property, it would most likely be a unit and probably out of the area where they had been renting. However, home ownership provides a couple of advantages.
Foremost, it greatly reduces the cash-flow pressure of having to find $20,000-$30,000 a year for rent, which is often referred to as "dead money". Capitalised, this is the additional $500,000 that ASFA says would be needed to cover the rent during retirement.
If we take the case of a couple who live in a major city and use their super to purchase a $700,000 property, leaving $300,000 in investment wealth, they would now be entitled to the full age pension, plus supplements, of about $35,000 a year. If they drew an additional $15,000 from their $300,000 investment portfolio, they would now have $50,000 a year to spend.
Compare this with the couple who do not own a home and invest the $1 million. The assets test for a non-homeowner couple has an upper threshold just over $1 million, so they receive virtually no age pension. They need to draw about $80,000 a year (including $30,000 for rent) to ensure the same lifestyle as the homeowner couple.