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Financial Planning
Household capital remains key: RIR

The Retirement Income Review (RIR) has found home ownership is an important element in an adequate retirement, but not at the expense of all other income generating options.

The potential fourth pillar of the Australian retirement income system, accessing household capital, was noted in the review as a plausible option with household assets having increased over the last 30 years.

"The size and composition of household wealth influences retirement incomes. Households with more financial assets at retirement are generally less likely to rely on the Age Pension for retirement income," the review said.

"Less liquid wealth, such as housing, can also support people in retirement, providing accommodation as well as a potential source of income."

However, the RIR noted households diverting their income to pay down large mortgage debt may struggle to build retirement savings outside of owning their home.

The RIR said this could cause a delay in when some households retire. The plausibility of including household capital as a fourth pillar of the retirement income system is therefore only valid in some circumstances.

The RIR noted Australian household net wealth has increased over the past 30 years with most of the increase being attributed to growth in the value of housing and superannuation.

The review noted superannuation asset values, as a percentage of household disposable income, have more than tripled over the period.

According to the Australian Bureau of Statistics (ABS), in 2017-18, on average, the family home continued to be a household's largest asset in dollar terms, followed by superannuation.

"The value of housing has significantly increased since the 1990s, nearly doubling relative to household disposable income," the RIR said.

"Existing home owners have benefited from increases in their net worth. However, the share of working-life income required to service a mortgage has more than tripled since 1980."

The report found increases in home values mean prospective home owners need to spend more of their working-life incomes to finance their purchase.

"As a result, people have less income available to either spend during working life or invest in other savings vehicles," it said.

The report noted that as the cost of housing has risen, as has the age of Australians holding a mortgage. The medium age for paying off a mortgage increased from 52 in 1981 to 62 in 2016, according to CEPAR.

"Indebtedness increases the likelihood of labour market participation, meaning households with mortgage debt at older ages are more likely to continue working," it said.

"Older owner-occupied households with mortgage debt are more vulnerable to negative economic and market shocks, especially if they retire.

"Declines in income or asset values could impede their ability to service mortgage repayments and push some households into financial hardship."

Household Capital welcomed the findings in the review and said it could lead to Australia to be a world leader in the provision of home equity as the third pillar of retirement funding.

Chief executive of Household Capital, Joshua Funder applauded the review's support of house equity access for Baby Boomers.

"For most Baby Boomers, voluntary savings outside of superannuation means the equity in their home. Australian homeowners entering retirement today only started to accrue three percent superannuation halfway through their working lives - it's simply not enough to fund more than 25 years in retirement," Funder said.

"Available home equity can double the amount of their superannuation and help fund their retirement. Accessing home equity can offer a responsible, long-term solution to allow current retirees to boost their retirement funding."

Associate professor in the School of Economics, Finance and Marketing at RMIT, Stuart Thomas, said despite the high rate of home ownership for many, superannuation and the age pension will still not be enough to support them comfortably, especially in late retirement.

"If the government is genuine about making equity release a more prominent method of retirement funding, and addressing this gap, it needs to address low financial literacy in this area," he said.

"Currently, equity release products - and reverse mortgages in particular - are often being used to pay out current debt, ahead of other uses such as home improvements to allow them to stay in the home longer, or for income support during their retirement. "

Read more: RIRRetirement Income ReviewAge PensionAustralian Bureau of StatisticsCEPAR
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