How much money can I have in the bank and still get the age pension?
After migrating from the UK to Australia in 1974, dad retired as a boilermaker in the early 1990s.
He always had a great head with numbers. As a child he told me that numbers create a pattern. Working with sheet metal, his numeracy skills were immensely valuable to him as he determined quite complex manufacturing calculations in his head.
My father was from a different era. Born during the Great Depression in 1928, he worked hard, often 7 days a week just to make ends meet. Unfortunately there was usually little surplus to show at the end. What was for certain was that he had no understanding of financial markets, it was was not within his realm of understanding.
After my mother had passed away, my old man went into his local bank to seek a better interest rate on his passbook account for the savings he had available from his 40 plus years of work.
Using all the old fashion charm he could muster to get himself a better deal with the bank, he asked the teller for the best interest rate they could offer. He though wondered how much money can I have in the bank and still get the age pension.
The bank teller directed my mathematically strong, but financial newbie father, to the bank’s own ‘financial adviser’.
He was promised significant returns, much higher than the very low interest rate he was currently receiving. This sounded fantastic to dad. He didn’t think he needed to be a genius to understand that the 9-10% return the ‘financial adviser’ was promoting was far superior to the mediocre passbook interest rate. Without hesitation he signed on the bottom line for a life of prosperity!
During the mid 1990’s the ‘recession we had to have’ coined by then treasurer Paul Keating hit Australia hard, causing fluctuations in the share market. My poor old man could see the value of his hard earned savings, now in the financial advisers recommended investment, falling and falling. It caused him significant stress and a fair lack of sleep.
Unfortunately for my dad, the concept of volatility, long term investing, diversification and the trade off between risk and return was not explained to him. More over, my father did not have an investment strategy – no goal other than hoping to get the over-the-top interest rate the bank explained he would get.
Now as we know today, share markets can be volatile. Whilst over the longer term we understand markets can grow, there are periods of volatility. To manage that volatility good investors today will have diversification in their investment, some money in Australian shares for growth. Perhaps also some monies in International shares and property. However good investors will also hold some monies in their savings accounts for those times when markets are not performing. The amount to hold in cash will be determined by the long term growth required to help the retirement savings last as long as you do.
Now as a Financial Planner, and if I could go back in time and be my father’s financial planner, I would do things differently. I would tell him that good financial management is about financial education and understanding how much money is enough to enjoy his later years. I would get him to create a simple budget so he could understand what he would spend his money on. The next thing I would try to help him understand is the need for an investment that provides both a regular income, whilst with some ability to grow to help the investment last as long as he does. I would help him understand the difference (and necessity) for assets that can grow and assets that will provide income. I would also help him structure his assets to maximise Age Pension and Centrelink entitlements.
Though of course, I can’t go back in time (and besides dad passed away around 15 years ago). So what I can do now is ensure my clients have all the information they need, which includes helping them understand how much they need for the retirement they want to live. If they already have enough and can quite simply enjoy having monies in low interest bearing accounts, then I will let them know to answer to – how much money can I have in the bank and still get the age pension. However for others without enough, I would explain the need to understand the right balance between growth and income investments. As dad would say whilst getting a good return on investment is good, a better return on life is more important. I like to think dad is looking down on me now and nodding with approval with the benefit of his experience.
Paul Turner is a Financial (Lifestyle) Planner and a big believer in life not being a rehearsal.
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