Pandemic causing uncertainty for retirement plans

The COVID-19 pandemic has generated uncertainty amongst both pre-retirees and the retired as the effects of the sustained period of low-interest rates continues, according to Paul Rogan, founder of Pension Boost.

Rogan said while it is too early to judge if the pandemic has brought forward the number of seniors retiring in Australia, it is certain that retirees will face years of low interest rates after promises made by the Reserve Bank (RBA).

“A recent study by Forbes Advisor highlights this uncertainty about retirement trends in the US. More than double the number of Baby Boomers brought forward their retirement plans due to COVID in 2020,” he said.

“An interesting point in this study was that more Americans want to age in place and not downsize. This is a consistent trend in Australia and has led to more interest in reverse mortgages to supplement cashflow impacted by low return markets.”

Financial planner John Hazell said more of his senior clients are considering the Australian Government’s reverse mortgage option, the Pension Loans Scheme (PLS), because of its advantages.

The PLS has been in operation in various forms since 1985, and from 1 July 2019, all Australian residents who own property can access the scheme, including self-funded retirees.

The PLS provides a simple equity release mechanism without the stress of having to consult multiple professionals or pay for multiple expenses. It also offers the flexibility of being able to be repaid in full or in part at any time without fees or penalties, and assist family members to avoid the transactional costs involved in downsizing.

“Another risk facing pre-retirees and those early in their retirement is that global stock markets are at or near record highs and a correction is likely on the horizon,” Rogan said.

“A market downturn early in retirement can materially adversely impact the time over which the nest egg will last. The Forbes Advisor report noted increasing interest in the use of reverse mortgages to mitigate this risk by tapping the equity in your home to support cashflows rather than having to sell growth assets in volatile markets.”

The PLS can also help to delay the erosion of other assets and can help to avoid capital gains tax (CGT) triggered from the sale of those assets.