Easing Into Retirement

Are you ready to retire?

In the past, that would have meant leaving work for good. These days, retirement is far more fluid.

You might simply want to reduce your working hours to give your mind and body room to breathe. Or you may want to leave your full-time job but keep your career ticking over with part-time or consulting work. Others may dream of leaving the proverbial nine-to-five to run a B&B or buy a hobby farm.

Changing retirement patterns:

There are already signs that people’s retirement plans are changing. In 2019, the average retirement age for current retirees was 55 years (59 for men and 52 for women (i)). However, for those currently aged 45 – the intended retirement age has increased to 65 years for men (ii) and 64 years for women.

There are many reasons for this gap between intentions and reality. Only 46 percent of recent retirees said they left their last job because they reached retirement age or because they were eligible to access their Super. Interesting to note, 21 percent retired due to illness, injury or disability, while 11 percent (iii) were retrenched or unable to find work.

Research highlights that women were also more likely than men to retire to care for others. But for people who can choose the timing of their retirement, there may be good reasons to delay.

Reasons for delaying retirement:

As the Age Pension age increases gradually from 65 to 67 years, anyone who intends to rely on a full or part pension needs to work a little longer than previous generations.

We are also living longer. A man aged 65 today can expect to live another 20 years on average, while a woman can expect to live another 22 years. (iv) So the longer we can keep working and building a nest egg, the further our retirement savings will stretch.

And then there is COVID. If you lost your job or your hours were reduced during the pandemic, you may need to work a little longer to rebuild your savings. Even if you kept your job, travel was restricted so you may have needed to postpone your retirement plans. But now that the COVID fog appears to be slowly lifting and borders are reopening, retirement may be back on the agenda.

Whatever shape your dream retirement takes, you will need to work out how much it will cost and whether you have sufficient savings to make it a reality.

Sourcing your retirement income:

The more you have in Super and other investments, the more flexibility you have when it comes to timing your retirement. If you plan to retire this year, you will need to be 66 years and six months and pass assets and income tests to be eligible for the Age Pension. But you do not have to wait that long to access your Super.

Generally, you can tap into your Super once you reach your preservation age (between age 55 and 60 depending on the year you were born) and meet a condition of release such as retirement. From age 65 you can withdraw your Super even if you continue working full-time.

But Super can also help you transition into retirement, without giving-up work entirely.

Preservation age:

Date of birth	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
From 1 July 1964	60

Source: ATO

Transitioning to retirement:

If you are unsure whether you will enjoy retirement or find enough to do to fill your days, it may make sense to ease into it by cutting back on your working hours. One way of making this work financially is to start a transition to retirement (TTR) pension with a portion of your Super.

Case study:

Ellie, a teacher, has just turned 60. She wants to reduce her workload to three days a week so that she can explore other interests and gradually ease into retirement. Her salary will drop but if she starts a TTR pension she can top-up her income with regular monthly withdrawals.

Most Super funds offer TTR pensions. You decide how much to transfer into a TTR pension account, but there are some rules:

You must have reached your preservation age
Money can only be withdrawn as an income stream, not a lump sum
There is a minimum annual withdrawal amount, for example: 4 percent of your TTR account balance (2 percent until June 2022) if you are aged 55 – 64 years
The maximum annual withdrawal is 10 percent of your TTR account balance
Income is tax-free if you are aged 60 or older; if you are 55 – 59 years, you may pay tax on the TTR income, but you receive a tax offset of 15 percent.

One of the benefits of this strategy is that while you continue working, you will receive compulsory Super Guarantee payments from your employer. A downside is that you will potentially have less Super in total when you finally retire.

If you are nearing retirement age and wish to boost your retirement savings in a tax effective manner, you may wish to consider concessional contributions. These contributions are generally taxed at 15 percent. However, they may reduce your assessable income.