Do you think you’re ready for retirement?

Noel Whittaker writes exclusive weekly blog updates for the Ban Tacs Group, with IN8 Business Advisory, a member of that group. Here, he talks about pension and superannuation upon retirement.

According to a recent report by Terry Rawnsley of KPMG, many older workers are deferring retirement. As result, over the last 20 years, the expected retirement age in Australia has risen to 65.2 for men and 64.3 for women. KPMG’s report attributes this to a range of factors, including strong labour market conditions, which help to retain older workers in jobs, changing social attitudes towards older workers, and an increasing trend towards part-time work among older workers.

COVID-19 has played a part too. With overseas travel virtually impossible for over 18 months, many older workers think they are better served by working longer than sitting at home with nowhere to go. Some need to top up cash reserves, because their income has been reduced by COVID-19. Others – a large percentage of the office workforce – are now happily working from home; while it has its challenges, many people find it beats both the office environment and the grind of commuting every day to and from an office.

But there’s more to it than any of these reasons. Pensionable age – that’s the age that you can access the pension – is increasing to 67 for people born after 1 January 1957, so anybody who wants to retire before their pensionable age needs to ensure they have enough capital to live on until they are eligible for a pension.

And there’s an even bigger factor. Because of the way mathematics works, the largest increase in any long-term compounding investment, including your superannuation fund, comes at the end of the period. Remember, every time your portfolio doubles in size, there is more growth in the final double than the sum of all the other doubles combined.

The numbers are mind-blowing. Think about a person aged 60, earning $100,000 a year, with $500,000 in super. If their fund earns 8% per annum, the balance would be $800,000 in another five years. That’s an increase of 60% in your superannuation just by working another five years.

The financial side is important, and obviously the longer you can defer your retirement the more your superannuation should grow, and the longer it will last. It is highly recommended to do some sort of work after you retire. Ideally, it could be some kind of part-time work that will add meaning to your life, as well as boosting your superannuation, or it could be voluntary work, or even working on a hobby. It’s not all about the money.

But the pension rules are geared to encourage us to work a little: the first $150 a week you earn from a business or personal employment is exempt from Centrelink’s income test. Let’s look at a couple of pensionable age, who have assessable assets of $405,000 made up of $380,000 in super, and the balance in car and personal effects. If they draw down the standard minimum of 5% a year from their superannuation, that gives them income of $19,000 a year. If they also each earn $7,800pa from paid work, they would be eligible to receive the full pension of $37,923 a year. That means a total tax-free income of $72,523 a year.

But the big picture is that one of the biggest decisions you will make in your life is when you retire. There is a wealth of research telling us that those who prepare and plan for retirement tend to have a much happier, healthier retirement than those who suddenly find themselves out of work with no plans. Ideally, retirement should not be something which is thrust upon you, but something you move into gradually. And remember, the longer you can delay starting to draw on your superannuation, the more it will grow.

Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au

3 October 2021

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