Navigating the path to retirement has changed over the years and while your parents’ generation no doubt gave up the grind after reaching ‘retirement age’, these days many Australians are choosing to remain in the careers they love for much longer, or fear giving up work altogether due to financial concerns.
Starts at 60 Money Club Expert and retirement planning consultant David Kennedy knows all to well the difficulties Aussies face in this stage of their lives and now he has shared his views on what has led to the change in retirement trends in recent years, plus some tips on how to grow your savings before giving up work.
Q. Do you think the increase in age to access the Age Pension and lack of super is contributing to more people choosing to continue working later in life?
A. The statistics tell us that the average age at which Australians retire is on the rise, and there are two common scenarios we see often in our retirement planning consultancy:
It is important to remember there is no compulsory ‘retirement age’ as such. While around 80 per cent of Australians over age 65 receive some level of Age Pension support, you can retire whenever you feel you have accumulated enough savings to fund the lifestyle you desire. Of course, that is easier said than done!
Those born after 30 June, 1964 are able to access their super in various ways in the event of retirement from age 60 and it is worthwhile obtaining professional advice on your options to ensure any decisions you make are cost-effective, tax-effective and consistent with your long-term financial and lifestyle needs. If we then explore the bigger picture, there are three major themes driving this trend towards later retirement – longer average life expectancy, changes to Centrelink eligibility, and a shortfall of retirement savings.
Longer life expectancy
On average, Australians over the age of 60 are healthier and living longer than previous generations. Rising living standards, medical breakthroughs, technological advances, better sanitation, improved lifestyle choices, and public education, have all contributed to longer average lifespans relative to last century. This offers the gift of additional time on earth, along with the challenge of funding those additional years in retirement. Where you are physically and mentally able, the longer you continue earning an income and building your savings, the more favourable the numbers when it comes time to draw down on your capital.
When it comes to Centrelink, the only constant is change – and long periods waiting on hold when contacting the call centre! For several years, policymakers have been sending a clear signal to those who will qualify for a full or part Age Pension in future, there is an expectation you continue to work an extra couple of years, where you are able to do so. This is an especially confronting reality for anyone in a physically demanding job, and I feel for those in manually demanding occupations, because for many, working longer is simply not an option.
The age at which you can access the Age Pension has gradually risen from age 65 and will reach 67 by 2023. In other words, if you are born on or after 1 January 1957, you will need to wait until age 67 to access any Age Pension payments. Meanwhile, in January 2017, the Age Pension maximum assets test limits were drastically reduced, so where the government of the day deems you to be of sufficient means, you are increasingly on your own.
Lack of retirement savings
While according to the Association of Superannuation Funds of Australia, there was around $2.9 trillion in total super assets in June 2019, the system is still maturing. It is easy to forget that compulsory superannuation has only been in place since 1992, when it was set at 3 per cent of wages, and has gradually risen to the current level of 9.5 per cent. As a result, the generation retiring now hasn’t had compulsory super contributions made on their behalf throughout an entire career. It will not be until around 2040 that the first retirees ‘cross the finish line’ with at least 40 years of compulsory super contributions under their belt (at 9 per cent or more).
The result is, that many older Australians live off a combination of Age Pension payments and income from their own savings throughout retirement.nLet’s dispel a common myth. More retirement savings obviously helps, but you don’t necessarily need $1 million or more to enjoy your retirement. How comfortable you are, depends very much on the level of income you need when your salary is no longer part of the equation, the various financial resources available to you, and how you structure your assets to maximise income in a tax-efficient way.
For example, a homeowner couple with $400,000 in super between them (with assumptions made for the value of their car and home contents), may receive a part Age Pension of around $34,000 per annum. If they also draw 5 per cent pa from a super income stream, or $20,000 pa, they could generate $54,000 pa tax-free. Depending on the mix of assets held within their super income stream, they may replace some (or all) of their income stream payments in most years.
In the case of a homeowner individual with $280,000 in super (with assumptions made for the value of their car and home contents), they may receive a part Age Pension of $21,000 pa, along with $14,000 pa from a super income stream, for total income of $35,000 pa tax-free.
Q. What steps can people take to ensure they are more financially stable in retirement?
A. It is never too late to plan for retirement, but the earlier you get started, the better. Think through the goals you will set for yourself and the combination of activities you may like to pursue. This may involve some combination of part-time work (paid or unpaid), travel, time with grandchildren, learning new skills, volunteering for charity, physical challenges, mentoring, and anything else that may be on your bucket list! Health permitting, the list is limited only by your imagination.
It is just as important to prepare for the lifestyle and emotional aspects of retirement as it is to devise a financial plan. The beginning of effective financial planning is then to build a detailed understanding of your household incomings and outgoings, both before and in retirement. Once you are clear on the level of income your will need, you can begin to plan how you will generate that income from a combination of financial assets and any Centrelink assistance that may be available.
It pays to obtain professional advice on making sound decisions on how to structure your financial affairs to achieve more favourable portfolio, Centrelink, tax and estate planning outcomes, so you have peace of mind you can generate enough passive income into the future, once your career comes to an end.
Q. What advice do you have for people looking to get back into the workforce in their 50s and 60s and beyond?
A. Underemployment among older Australians is a real problem, and many would happily continue working in some capacity, if age discrimination was less prevalent, and more flexible jobs were available. The casualisation of the workforce and the rise of the ‘gig economy’ has also eroded job security and caused many older Australians to work beyond their preferred retirement age as they simply cannot save enough due to broken work patterns or a lack of full-time work.
Age discrimination in the recruitment process and the workplace makes job-hunting for older Australians a daunting task. Sadly, becoming unemployed due to redundancy or other reasons in your 50s and 60s, can lead to involuntary retirement, where you simply can’t secure a new role (or enough hours), even though you would rather still be working.
Everyone is worse off in this scenario. The job-hunter’s skills and experience go to waste leading to potential mental health challenges, employers miss out on the talent, reliability and mentoring potential of older workers, it places more pressure on the social security system, and drags on workforce productivity. Numerous studies have shown that material increases in workforce participation among older Australians can meaningfully boost the economy and counter the fiscal challenges of an ageing population.
But there is hope, and there are ways you can improve your chances of finding new job later in life:
It is also worth thinking through your motivations for seeking a new role. Is it more about money or meaning at this point in life?