Retiring in Australia
What is the Pension?
The pension is an income stream you receive in retirement. This can refer to the government pension or a superannuation pension.
The government pension is the main government income assistance for people who have reached pension age. This is currently 65½ years but will go up 6 months every 2 years until 2023, where it will be 67. This may continue to increase to 70 if government proposals are accepted.
The superannuation pension on the other hand can start once you have reached your preservation age. Your ‘Preservation Age’ is 55 years of age if you were born before 1 July 1960, and 60 years of age if you were born after 1 July 1964. It gets slightly confusing if you were born in the five years between 1 July 1960 and 30 June 1964. The best way to explain is with this small table.
How much can a pensioner earn before it affects the pension?
A pensioner can earn an income while they are receiving the pension from the government, but there are a couple of Centrelink rules that will affect the amount.
Firstly is the asset test, the age pension will reduce when your assets are more than the below amounts (as at 1 July 2018).
Secondly is the income test, this is assessed using all sources of your income including that from your superannuation and other financial assets. Deeming rules apply and are used to work out what your assets are worth as income. A set rate is used irrelevant of what your assets really earn and this amount is added to your total income.
The current rates are;
Singles - 1.75% on the first $51,200 of your financial assets and 3.25% thereafter
Couples (with at least one getting a pension) - 1.75% applied on the first $85,000 of your financial assets and 3.25% thereafter
Couple (with neither getting a pension) - 1.75% on the first $42,500 of your own or your joint share of financial assets and 3.25% thereafter
The below tables shows fortnightly income amounts for both singles and couples and how it affects the pension received.
What is the retirement age in Australia?
There is no set retirement age in Australia, although many choose to do so at the age they become eligible for the pension (pension age) or can access their superannuation (preservation age).
What is the retirement age for women in Australia?
Again there is no set retirement age but in regards to the pension age for women, unless you were born before 1949 and are already receiving the pension there is no longer a difference between male and female eligibility. This is also true of the preservation age, when you can access your superannuation is the same for both men and women.
What is the best month to retire Australia?
If you are thinking of retiring, the month in which you do so should be a consideration. December is the best month to retire in Australia. Due to the financial year for tax purposes being 1 July to 30 June the following calendar year, retiring in December allows you to earn the most amount of income and pay the least amount of tax. You will essentially only be paying tax on a half year’s earnings.
Financial Planning & Preparation
To be financially prepared for your retirement you need to get a really clear picture of what you want it to look like. How much money you will need in retirement is personal and depends on your own needs, wants and expectations. Ask yourself questions like;
Do I want to travel?
Will I remain living where I am or will I downsize?
Will I continue working part time?
These types of questions will all help in creating that picture. The answers to these questions will determine the amount you will need to retire stress free.
What is your financial position?
Make an assessment
Not only of your current situation but how much you are likely to have in the future. Will you have continued sources of income or will you be looking to support yourself from superannuation and/or the age pension?
- Look at what assets you currently have (a house/s, a share portfolio, savings, business assets and so on)
- How much super do you currently have, how much will you have in retirement and when can you access this?
- Will you have paid off all debt by retirement? (Using your super to cover any outstanding debt once you are able to withdraw is an option but not the best one). Ideally all investments will be positively geared by then
- Will you qualify for all or part of the government Age Pension?
Make a financial plan
Once you have made an assessment you will be able to create a financial planning template.
The answer is now. The earlier you start to plan, the better prepared you will be come retirement. Even people in their 20s and 30s can be doing things like;
- Reducing debt, in particular bad debt
- Getting a financial education
- Increasing earnings potential
- Salary sacrificing to pay less tax now
Factors to be considered in your planning are;
- Lifestyle - what are your current costs and are these likely to change?
- Will you downsize your home, thus saving money?
- Are you planning any significant outlays between now and then? (Overseas holidays, weddings, new car, renovations or a new house).
- How long until you retire, are you able to increase your contributions between now and then?
Create a Retirement Financial Plan Checklist
- Get financial advice
- Work out a retirement budget - include spending on big ticket items
- Make a retirement plan - build in ‘risk’ not just for yourself but for family members (eg children returning to the nest)
- Maintain an emergency fund
- Calculate a realistic and manageable retirement income (it may be helpful to work this out on a timeline)
- Stay informed about your super balance
- Increase your savings - this may mean diversifying investments
- Get out of debt
- Increase your superannuation contributions
- What are your potential retirement health care needs - factor in likely scenarios
- Get educated - not only about superannuation, but things like government entitlements and tax benefits (selling investments after retirement)
Retirement Planning Mistakes
It is important to remember that finances although extremely important are not the only consideration for retirement. Your health, happiness and overall enjoyment of life (including worklife) are just as essential. Keeping that in mind one of the biggest mistakes is;
Retiring too early
If you get fulfillment from working and it provides you with personal satisfaction why stop? You may consider decreasing your hours at work as you discover what it is you will do to maintain this type of stimulus beyond the workforce. Stopping work without a plan on how to ‘fill your day’ can be confronting and have a long term negative impact on something that should be relished.
Other mistakes include;
Failing to get financial advice
There are a list of things that a financial adviser brings to the table in regard to managing your finances and long term planning that as someone not in the ‘industry’ simply don’t have. These include, knowledge, experience, training, qualifications, contacts, research and often most importantly an objectivity that you can not possess. The ability to remove emotion from big financial decisions can be crucial.
Not having a financial plan
This could really impact the type of retirement lifestyle you have. A good plan will involve getting financial advice about your investments and the risks attached to them, educating yourself regarding your budget and tax position, insurances you will need including health (which is likely to increase) and estate planning and wills.
Not having a retirement budget
No matter how much you have saved, not having a budget in your retirement could see you run out of money!! Financial advisers suggest you will need somewhere between 65 and 80% of your pre-retirement income to continue living in the manner to which you have become accustomed. It is normally cheaper to live in retirement given you are no longer making superannuation contributions and your home is typically paid off.
Leaving your money in the bank and not diversifying your investments
Shares and property generate capital growth over the longer term and returns may be taxed favourably. Spreading your money across asset classes like cash, fixed interest, shares and property can produce more consistent returns over time.
Leaving it too late
Starting young and saving small amounts regularly is the most certain path to financial independence. But at the same time, it’s never too late to start planning for your retirement either.
Not doing your research
Research everything; From your financial adviser (www.adviserratings.com.au) to the types of investments you prefer, to the cost of that overseas holiday you want to take once you retire. Undertaking a period of research also gives you time to really make decisions that will suit you now and in the future. Some things that initially look good, might in fact not be appropriate on closer inspection.
The Money Smart website has a free and easy to use calculator to help you on your way
Essentially the plan for an income stream to fund your retirement. The main being;
Superannuation has many tax benefits. Firstly by salary sacrificing you will save money on tax with your day to day salary. It also saves you tax in the medium term as the earnings on your super investments are taxed at the lower concessional rate. Long term, the tax benefits include accessing your investments and drawing an income in retirement in a low tax environment.
Semi-Retire or Working Part-time
Not only may this delay drawing from your superannuation, depending on your cost of living you may even be able to continue to top up your super. At the very least it will reduce the amount you are taking out and you pay no tax on income from superannuation from the age of 60.
The government actually provides incentives to encourage people to work past the pension age.
See the work bonus scheme on the Centrelink website.
Making Your Money Last
There are a number of ways to make your money last you through your retirement, from downsizing your home to working part-time. A huge contributing factor is getting good advice on your invests.
With life expectancy in Australia ever increasing and many retirees living beyond the age of 90, it's a good idea to diversify your investments. Investing in assets that will grow over time, like shares and property, will help ensure your capital will grow in value to keep pace with inflation and your income needs.
Work out a Budget
A good place to start is by checking out the ASPRA Retirement Standard, where you will find detailed budgets for different households.
Use a budget planner to see where you money is going and where it is you can cut back to ensure you are not overspending.
Take advantage of your entitlements
Even if you do not qualify for the pension, you may still be eligible for other benefits. These include, travel concessions, lower prices on medication and reduced council and water rates. The Seniors Card will also give you discounts on travel and some retail services.
See the Department of Human Services’ Commonwealth Seniors Health Card webpage for more information.
Where to get retirement advice
Obvious choice, a Financial Planner. The Adviser Ratings website is the perfect place to find an adviser who is right for you.
To get a basic understanding of retirement before you make an appointment with an adviser, there are plenty of websites that provide free and independent information about retirement planning. Below are just a few;
- Council of the Ageing (COTA) - an independent consumer organisation run by and for senior Australians.
- Department of Human Services (DHS) - Information on the Age Pension as well as offering an independent, face-to-face service to provide help with your financial decisions.
- Department of Veterans' Affairs - Information and support for veterans and their dependants, including pensions, compensation, healthcare and counselling services.
- National Seniors Australia - a service that helps people aged 50 years and over (not for profit organisation).
Self Managed Super Funds (SMSF) - DIY retirement
The biggest attraction with planning and then financially managing your own retirement is cost cutting. The idea of not handing over your hard earned dollars in fees and commissions is tempting, however what stage of life you are at is something to consider before heading down this path. For example someone who is earning a high income, with decent money in super and a couple of decades out from retirement might do well with a SMSF. However another individual with less money in super and nearing retirement might seriously do well from professional advice on how to make that money last. One of the major pitfalls in DIY is lack of objectivity. As a DIYer, you need to consider;
- Can keep your emotions out of it?
- Do you have the time to devote to researching and educating yourself on all of your investment options?
- Have you considered all aspects of what the planning entails, like taxation, wills and estate planning, insurances including health?
- Reporting member contributions and other regulatory information. It can be far more complicated than you think.
If you are planning to DIY, there are now many online tools and resources to help you on your way. From simple things like finding out your credit score to comparing aged care options for you or your loved ones. Getting help dealing with Centrelink to actual online investment advisers. Adviser Ratings showcases the best in the business on their website
Other useful Links
The Money Smart website has plenty of tips and links, plus a calculator to help with your planning before and during retirement.
The Australian Taxation Office website will be able to provide you with information regarding how your taxation and superannuation interests will be affected by the decisions you make about income, working and retirement.
Don’t let your retirement be a let down due to lack of planning. This is what you have literally been working towards your whole life. Start early and get some professional advice to ensure you have the best retirement you possibly can!!