Retirement: a new stage of life
What does retirement look like for you? Are you looking forward to finishing work or are you dreading the thought of no longer going to work every day? For some people it’s a time to look forward to, while for others, it is a daunting phase of life. For many of us, work is a key aspect of our identity, our social network and our financial wellbeing.
In this article, we take you through the ‘what, when and how’ of transitioning to retirement.
What do you want to do in retirement?
It’s worth taking the time to think about your goals and what you want to achieve in retirement. Planning and thinking about retirement may also ease some of your associated worries.
Common goals in retirement:
- Spending more time with children and grandchildren.
- Taking up a pastime, sport or hobby.
- Travelling in Australia or overseas.
- Doing volunteer work or helping your community.
- Getting involved in a club or church activities.
- Gardening or working around the home.
Once you start to go into detail it may help you (and your partner, if relevant) to consider how you will make the transition to full-time retirement and, importantly, what financial resources you may need to realise your goals.
When do you want to retire?
When you retire, you no longer have a regular income so you’ll need to access your super, any other investments you may have and the Government’s Age Pension benefits to support yourself.
When can you access your super?
To access your super you must first reach your ‘preservation age’. The minimum preservation age is 55 years for those born before July 1960. This increases on a sliding scale up to age 60 for anyone born after June 1964.
|When were you born?||Your preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 30 June 1964||60|
However, you can choose to work longer and retire later, especially if you think you’ll need to rely on the Age Pension in retirement because you can’t access the Age Pension until much later.
When can you access the Age Pension?
If you were born after 1 January 1957, the age you are eligible for the Age Pension is age 67. If you were born before 1957 then you will become eligible at a slightly younger age, as shown in the table below.
|Date of birth between||Age eligible for age pension|
|1 July 1952 and 31 December 1953||65½|
|1 January 1954 and 30 June 1955||66|
|1 July 1955 and 31 December 1956||66½|
|From 1 January 1957||67|
Timing your retirement is important because if you retire too early, your super and other investments may run out before you’re eligible for the Age Pension. For instance, for someone born after 1964, if they retire at 60, then their super and other investments would need to last for seven years before they are eligible for the Age Pension.
How will you transition to retirement?
For some people, stopping work and going straight into full time retirement is a good option. For others, a transition to retirement strategy gives them more time to save for retirement or additional emotional stability by slowly easing into retirement.
By using a ‘transition to retirement pension’, you can generally access between 4-10% of your super balance each year, as long as you've reached your preservation age, even if you’re still working. You can’t take a lump sum but your pension can make periodic payments either fortnightly, monthly, quarterly, half-yearly or yearly.
A transition to retirement strategy can be used in two ways:
Reduce your working hours while maintaining the same income
A transition-to-retirement strategy allows you to supplement your income by drawing a regular pension payment from your super fund. You could choose to move to part‑time work or reduce your working hours, and replace lost salary with income from the transition-to-retirement pension.
Save money by reducing your tax bill
Or, you could continue to work full-time but reduce your tax by taking a pension and salary sacrificing some of your income into super. This is how it works:
- You contribute part of your salary to super (where it is generally taxed at 15% rather than at your marginal tax rate).
- You then move your super money into a transition-to-retirement pension and use the pension income to supplement your reduced salary. The tax-effectiveness of the pension payments will help lower your overall personal tax bill.
Once you decide to retire full time you can take your super as a lump sum, start an account-based pension, also known as an income stream, or a combination of both. The benefit of starting an account-based pension is that it provides a regular income with minimum pension payments each year, which is calculated according to your age. Unlike a transition-to-retirement pension, there is no maximum payment amount.
Tax benefits of account-based pensions
- An account-based pension can be more tax-effective than taking your super as a lump sum (particularly if you are under age 60).
- The earnings from investments in your account-based pension are tax-free. These tax-free earnings remain in your account and increase the account balance.
- And, both lump sum and pension payments from your account-based pension are tax-free once you turn 60.
How long your pension lasts depends on what you want to do in retirement, how much super you have, how much you withdraw each payment, the investment returns and the amount of fees. So, careful planning is important.
If you’re nearing retirement and need to put a plan in place you should seek advice from your financial adviser. They can help you manage your transition to retirement and give you peace of mind. If you don’t have an adviser we can put you in touch with one.