BY WEALTH ADVISER
Introduction:
Retirement planning is a critical aspect of financial well-being for Australians. As the population ages and life expectancies increase, ensuring a comfortable and secure retirement has become more important than ever. While factors such as superannuation and the Age Pension play significant roles in retirement planning, home ownership has emerged as a crucial element in achieving a comfortable retirement. This article will explore the current state of home ownership among retirees in Australia, the financial and emotional benefits of home ownership, the challenges faced by non-homeowners, and the importance of innovative retirement income solutions that provide certainty.
The current state of home ownership among retirees in Australia:
According to the Vanguard report “How Australia Retires,” 71% of retired Australians own their homes outright, while 8% own a home but still have a mortgage to pay (Shrimski, 2024). The report also reveals that 18% of retired Australians are renting their homes, with the percentage of retirees renting or having a mortgage significantly higher (31%) for those who are not in a relationship compared to those with a partner (8%).
The retirement confidence levels among these groups vary significantly, with only 16% of outright homeowners feeling slightly or not at all confident about funding their retirement, compared to 57% of renters expressing the same sentiment. This suggests that renters are more than three times as likely to have relatively low retirement confidence compared to those who own their homes outright.
The financial benefits of home ownership in retirement:
Owning a home outright in retirement offers several financial benefits. Firstly, it eliminates the need to pay rent, which can be a significant expense, especially in areas with high housing costs. This allows retirees to allocate more of their income towards other essential expenses, such as healthcare and leisure activities. As the Vanguard report notes, housing costs such as rent and mortgages impact retirement wealth (Shrimski, 2024).
Secondly, homeowners have the potential to access the equity in their homes to fund retirement expenses. As Andrew Boal (2024) points out, “Given the amount of wealth stored in home equity in Australia, one could reasonably argue that the home is just as important as superannuation and the Age Pension when considering retirement outcomes.” Strategies such as downsizing or using home equity release products can provide retirees with additional funds to support their desired lifestyle.
The Vanguard report also highlights that 27% of working-age Australians view their family home as a place where they want to live but also believe it can potentially fund aged care or unexpected expenses if needed, with 28% of retired Australians sharing this belief (Shrimski, 2024). This demonstrates the potential for home equity to serve as a financial safety net in retirement.
Furthermore, home ownership offers emotional and psychological benefits. The Vanguard report reveals that 34% of working-age Australians and 41% of retirees view the family home as a place where they want to live until they die, demonstrating a strong emotional attachment (Shrimski, 2024). This sense of security and stability can contribute to overall well-being in retirement.
Challenges faced by non-homeowners in retirement:
Retirees who do not own their homes face several challenges. Renting in retirement can be a significant financial burden, as it reduces the amount of income available for other essential expenses. This is particularly problematic for retirees who have limited superannuation or other savings. The Vanguard report notes that working-age Australians who believe they are unlikely to own a home when they retire are more likely to not have a clear plan for retirement (55% vs. 33% who expect to own a home) and are also more likely to have relatively low retirement confidence (55% vs. 23%) (Shrimski, 2024).
Non-homeowners also have limited access to home equity as a financial resource. Without the option to downsize or use home equity release products, they may struggle to fund unexpected expenses or maintain their desired standard of living. This can lead to a lower quality of life in retirement and increased financial stress.
To improve retirement outcomes, renters can consider strategies such as increasing their superannuation contributions, investing in other assets, or exploring affordable housing options. Policymakers can also play a role by addressing the financial disincentives to accessing home equity, such as removing or refunding some of the frictional costs associated with downsizing (Boal, 2024). Additionally, policymakers should consider measures to improve equity in the system for renters, making renting more affordable, especially in retirement.
The importance of certainty in retirement:
Justine Marquet (2024) highlights the importance of certainty in retirement, as retirees face concerns such as running out of money, facing unexpected health and aged care costs, and maintaining a comfortable standard of living. Uncertainty about these factors can significantly impact the quality of life in retirement, both financially and emotionally. Marquet notes that the upheavals of recent years, such as market volatility, inflation, and the cost of living, have influenced retirees’ financial confidence and led to a diminishing drawdown of savings.
To address these concerns, Marquet suggests that innovative retirement income solutions, such as investment-linked lifetime income streams, can provide certainty, flexibility, and the ability to access capital when needed. These next-generation solutions can help retirees achieve a better quality of life without increasing the likelihood of outliving their savings. A 2022 Actuaries Institute report noted that combining traditional products with innovative solutions could lead to a remarkable 30% increase in retirement income (Marquet, 2024).
Conclusion:
Home ownership plays a vital role in achieving a comfortable retirement in Australia. Outright homeowners enjoy greater financial security, lower housing costs, and the potential to access home equity to fund their desired lifestyle. In contrast, renters face significant challenges, including higher housing costs and limited access to home equity as a financial resource, which can lead to lower retirement confidence and a reduced quality of life.
To ensure a comfortable retirement for all Australians, individuals should prioritize home ownership as a long-term financial goal. Policymakers should also consider measures to support home ownership and improve retirement outcomes, such as addressing the financial disincentives to accessing home equity, promoting affordable housing options, and improving equity in the system for renters. Furthermore, innovative retirement income solutions that provide certainty, flexibility, and accessibility can help retirees achieve a better quality of life in their golden years.
As Australia’s population ages and the superannuation system matures, it is crucial to recognize the importance of home ownership in retirement planning and take proactive steps to support it. By doing so, we can ensure that all Australians have the opportunity to enjoy a comfortable and secure retirement, regardless of their homeownership status.
References:
• Boal, A. (2024, July 24). Rethinking how retirees view the family home. Firstlinks.
• Marquet, J. (2024, July 17). Why certainty is so important in retirement. Allianz Retire+.
• Shrimski, D. (2024, June 19). The new retirement challenges facing Australians. Vanguard.
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