Like many people with illiquid assets, such as property, long-term venture capital investments or capital growth shares, retired accountant Krawczuk had to devise a strategy to ease the cost-of-living squeeze.

“I thought about selling my apartment, but the alternative of using its equity with a reverse mortgage to help fund my retirement provides income for life. I’m confident that I now have enough to live day-to-day and plan ahead,” she says.

Increased interest rates, bracket creep, sluggish real wages growth, and the high cost of living are forcing more people, particularly retirees and families with hefty mortgages, to look for ways of increasing income that doesn’t involve increasing debt.

“The average income tax take has climbed from about 14 per cent in 2009 to its current level of over 20 per cent,” says David Clark, a partner with investment management company Cameron Harrison. “Australia now has income tax back at pre-GST levels, and we pay the additional 10 per cent GST too.”

Experts give their advice on how asset rich individuals and couples can boost their incomes.

Reverse mortgages

A reverse mortgage allows you to borrow money using the equity in your home as security. If you’re aged 60, the most you can borrow is likely to be 15 to 20 per cent of the value of your home, according to the government’s MoneySmart.

“As a guide, add 1 per cent for each year over 60. So, at 65, the most you can borrow will be about 20 and 25 per cent,” it says. “The minimum you can borrow varies, but is typically about $10,000.”

Depending on your age and lender, you can take the money as a regular income stream, line of credit, lump sum or a combination of these. Krawczuk says her reverse mortgage via Household Capital enables her to maintain her lifestyle as other retirement savings shrink. For an estimated 4.5 million retirees, equity in their home is on average about four to five times super savings, which for male Baby Boomers is about $150,000, and for women about $80,000, according to government research. The loans enable the borrower to access the unencumbered value of their property. Interest rates for the government’s Home Equity Access Scheme (HEAS) are a bargain 3.95 per cent. That is lower than the Reserve Bank of Australia’s cash rate of 4.35 per cent and commercial reverse mortgage rates of between 8 per cent and 10 per cent. The government scheme allows retirees to top up their retirement income by up to 150 per cent of the maximum rate of a qualifying pension. That’s about $2400 for couples and $1600 for singles, and imposes a 12-month cap of 50 per cent of the maximum annual age pension, or about $14,000 for singles and about $21,000 for couples.

Brendan Ryan, principal of Later Life Advice, says: “The mechanics of the HEAS are a bit tricky to get your head around, and for self-funded retirees who don’t like the idea of dealing with Centrelink, the prospect can seem a little daunting.

“But to a self-funded retiree couple with low-yielding assets that stop them getting an age pension, you would be mad not to look at what your needs are and see if it cannot fit in.”

Providers of commercial schemes claim theirs are more flexible and provide lump sum payments, rather than cash top-ups.

“Quite different from HEAS, we can help refinance bank mortgages in retirement, undertake age-appropriate renovations, and fund major health events,” Household Capital chief executive Josh Funder says.

Downsizing

Downsizing and depositing the money into super can significantly increase cash flow. Empty nesters from age 55 who decide to sell their home can use generous federal government concessions to top up their super by $300,000 for individuals and $600,000 for couples. Downsizer contributions do not count towards regular concessional and non-concessional contribution caps, and can be made regardless of your total super balance. That means retirees can add the proceeds of the sale of the family home even if they have already saved $1.9 million in super. However, the transfer balance cap means only $1.9 million can be transferred from accumulation phase into tax-free retirement income. The balance could be left in accumulation phase, which is still taxed lightly at 15 per cent. The property being sold must have been a primary residence at some point and been owned by the claimant for at least 10 years.

“There are many older people across the country who are living alone or with their partner in valuable, equity-rich family homes,” says Michael Hutton, a wealth management partner at HLB Mann Judd Sydney.

“While they may be living in a property worth millions of dollars, they are living frugally – the classic asset-rich, cash-poor dilemma.

“Another scenario may be that you also have minimal investment income and are perhaps relying on the government age pension to finance your daily life. You’ve realised that properties don’t remain pristine on their own. You need to spend time, money and effort on upkeep, otherwise it can become poorly maintained or, in some cases, dilapidated.

“If you can relate to all or even part of this scenario, you could probably live a more comfortable life by downsizing.”

Asset sales

Other strategies for asset rich, cash poor investors can include selling property, depositing in higher interest savings accounts, investing in income stocks, and low-cost exchange-traded dividend funds. Selling assets such as an investment property or holiday home might seem like a big step, but if you’re struggling to fund the lifestyle you want, maybe it’s time to consider divesting. Some asset rich, cash poor property owners in Victoria are selling up because of rising state taxes.

Emma Bloom, a buyer’s agent for Morrell and Koren, who deals with properties exceeding $8 million, says: “Owners of expensive seaside properties that are not the principal place of residence are getting rid of them. They do not want to pay the increased land tax.”

In other states, particularly Western Australia, soaring real estate prices are encouraging many to cash in on their capital gains to top up their superannuation savings, or go on overseas holidays.

“The state is booming,” says Karen Firth, director of Art of Real Estate, a Perth-based real estate agency. “Asset rich Baby Boomers are selling investment properties they bought 20 years ago and going on international cruises and spending a ton of money.”

Sellers should expect to pay about 10 per cent of the property value in moving costs, according to analysis by buyer’s agency Wakelin Property Advisory. It estimates moving costs are about $107,000 for a $1 million property, and more than $200,000 for a $2 million property. Another option for generating extra cash is to convert holiday homes into rental properties. “Owners should look at changing their holiday houses to investment properties so all expenses are fully tax deductable,” says Sahil Bhasin, founder of Bricks & Mortar Real Estate. He says a $2 million holiday home used for just four weeks a year will annually cost about $30,300 for taxes, maintenance and all associated holding costs. But a 45 per cent taxpayer could negatively gear the property and annually deduct nearly $14,000.

“They can rent out another property for their own holidays but still benefit from any capital gains on their own property,” he says.

The Australian Tax Office closely monitors holiday home rentals. Those considering renting a holiday house should seek tax advice on income and capital gains tax.

Make your savings work harder

If you’re struggling with living costs, now could be a good time to reassess saving and investment decisions.

For example, around 20 per cent of assets in self-managed super funds, or about $140 billion, is in low-yielding cash and term deposits, and could be made to work harder.

The gap between the highest and lowest rates is continually changing, which means savers looking for the best rates need to be prepared to change products, or banks. Savers also need to lock away their money for at least three months to earn higher interest than the inflation rate of 3.6 per cent. None of the best rates are offered by the big four banks. Top paying fixed deposit returns for one and two months are a measly 2 per cent.

Bank of Sydney and Judo Bank are paying 5 per cent for three months, which is better than the top rate of four months.

Between five and nine months the rate jumps to between 5.10 per cent and Judo Bank’s 5.25 per cent.

Heartland Bank’s one-year rate of 5.35 per cent is the top long-term payment, beating anything on offer for up to five years. Some higher rates are paid to new, rather than existing, savers or only apply to special accounts with extensive terms and conditions to qualify for the best rate.