Solving the Asset Rich, Cash Poor Problem at Retirement

The problem of asset wealth and cash poverty is increasing in frequency due to the increase in property values over the past decade, as well as the fact that more people are living into their 90s.

Paul, you cannot eat bricks, was something my old neighbor once told me.

You may be financially stable and have significant assets, but you still need to generate cash flow in order to pay your bills and feed yourself. While you’re working, it’s not a problem, but when you retire, you need to either liquidate your assets or have them generate income to spend.

This week, we will look at some ways you or an elderly family member that you are caring for can solve the problem of having a lot of assets but little cash.

The “problem” that comes with being rich in assets and poor in cash is, on many levels, a positive one. It’s much better to be asset-rich and cash-poor than the opposite. You have some assets, but they are not easily spent.

Most often, the solution to the asset-rich, cash-poor problem is the family home.

Downsizing is the obvious solution. You can sell the house you live in and buy a new home for a lower cost. Then, you can use the money you saved to live.

Governments have generous provisions in this area. There are concessions in most states on stamp duties for people who downsize. This can be helpful, especially given the high stamp duty rates seen, especially in Sydney, Melbourne, and Brisbane.

You can also use the downsizer provision in superannuation to increase your super by using funds from the sale of a home. This is beneficial on many levels. One benefit is that you can put extra money into the tax-free stream of income in pension phase superannuation. This also allows you to avoid contribution caps, especially the non-concessional cap, where you might have already used the bring forward provisions when retiring. This is because Downsizer contributions are subject to a separate limit.

Downsizing may not be the best solution for everyone. Downsizing is not always an option for people who have local communities that are of increasing value to them as they age. This is because it often requires a move away from their community. Some clients have found that the sale price of their house, which they may have lived in for more than 40 years, is not comparable to the cost of a smaller unit or townhouse in the same area. They would also find there would be no money left over after the move. They may have to spend extra to make it work. This defeats the purpose of moving in the first instance.

Downsizing your home can also negatively impact your Age Pension. Your home is not considered in the asset test. Imagine that you had sold your $1.5 million house and bought another one for $1,000,000. This would have freed up $500,000, but this $500,000 gain is now included in the asset tests for Centrelink, which will reduce your pension. Fair enough, the income from your $500,000 is likely to exceed the amount you lose on the age pension. However, this can be a real kick to the gut when you’re trying to increase cash flow.

A pension loan scheme is a good alternative. The government offers a scheme where you can borrow money based on the value of your house. The government can give you small lump sums, but most often, they will pay you a regular monthly income. There is a formula that determines what’s possible, but the main concept is you don’t have to pay back the loan during your life or until you sell your house. The government won’t ask you to do this. The government offers a reverse mortgage, but people feel more comfortable using it than private lenders. I think the Pension Loan is the best solution for those who have a lot of assets but little cash, provided they don’t want to downsize. It would be best if you were at least the age of pension to qualify for this scheme. This is usually 67 years old.

This asset-rich, cash-poor problem can sometimes arise for people who own two properties, such as a suburban home and a beachfront house. They could have managed the two properties well when they had a family and income. Now that they are retired, the couple is using their holiday home more. The second property will likely knock them off their Age Pension, and two properties mean two council rates. If you don’t do some holiday rentals, which I have never seen with retirees, though I am sure that it happens sometimes, neither of these properties will provide you any income or cover your running costs.

In this situation, it may be best to sell your main residence, as capital gains taxes are not applicable, and then move to your beach house. If you want to establish yourself in the city, you could buy a small flat. However, your primary residence will be tax-free.

Sometimes, the issue of having a lot of assets but little cash is due to holding assets with a large capital gains tax obligation. You may have been given a large number of shares of a company as an employee, and the value of those shares has now increased significantly. Maybe it was an asset that you inherited, and the cost base is included.

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