Not a millionaire retiree? You can still have an epic retirement: here’s how
I spent the second half of this week at the Financial Consultancy Australia conference and it really brought something into focus for me. Many Australians do not retire comfortably.
We don’t talk enough about what retirement will be like if you don’t have a lot of money or how you should plan for it. We also can’t speak highly enough of financial advisors and how they help people who are struggling or in debt get back on track.
We tend to talk about retirement as if it’s something people enter into by choice, with confidence and enthusiasm. You’re expected to build your retirement fund, pay off your house, and walk away from work with some control over what happens next.
But that’s not the case for everyone right now. In fact, close to half of Australians retiring today rely on age pensions for a significant portion of their income, with only a third or more retiring by choice.
So what does retirement planning look like for people who don’t have “enough” money, haven’t had a chance to plan, or are stepping away from work because health care or caregiving responsibilities take over?
In that world, it’s not about optimizing your retirement and choosing the date. It’s about learning to live with the choices that may be imposed on you and making the most of the opportunities you have.
What matters is not how much pension you have as a lump sum, but how much income it generates and how much you choose to withdraw.
Rebuilding your financial confidence is the first step, and the best way to do this is to understand how the financial systems that support retirement work and how much money you can rely on from passive income sources such as an old age pension or annuity.
Age pension in Australia can be accessed from the age of 67 if you meet the means and income tests. It currently pays $31,223 a year for single people and $47,070 a year for couples, creating the basic income tier that many people will rely on for years to come.
In addition, they can add rental assistance and retiree privilege card advantages that every retiree can access. If you are caring for a loved one full-time and are under the age of 67, you may be eligible for Carer’s Pay and discounts similar to the age pension.
Then, if you are over 60, you look at how you can combine the age pension or other benefits with income from your pension fund.
The average super balance for people aged 60-64 in Australia is $219,773 for men and $163,218 for women. But what matters is how much pension you have in your lump sum, how much income it generates, and how much you choose to withdraw each year. This is the important calculation and will give confidence to your situation.
In retirement, up to $2 million in income from retirement balances is tax-free when you transfer it to a retirement phase account (an investment account with your retirement fund that you must physically open and deposit the funds into).
This is important to know because it is fundamentally different from how income works while you are working. When you were working, your planned wage was pre-tax, or gross, income, so most people in the workforce lose 30-35 percent or more of their income to taxes before they start spending it on living expenses. When you retire, income from the age pension is below the tax-free threshold and income from a small pension balance is tax-free.
If you have left your job or are unemployed, you can access your pension from the age of 60, or from the age of 65 if you are working. If you’re currently working between ages 60 and 65, you can access a transition-to-retirement strategy that allows you to withdraw up to 10 percent of your retirement benefit each year as an income stream, tax-free.
This can be used in some clever ways: for example, supporting a part-time job that may not pay enough to cover all your living expenses; or, actively contribute to the retirement fund by taking advantage of the lower tax contribution rate of 15 percent on the first $30,000 of concessional contributions each year. All income is obtained through the retirement system and is tax-free.
Once your retirement reaches the retirement phase, you must withdraw a certain percentage of your balance based on your age. It starts at 4 percent of the balance until age 65, then rises to 5 percent from 65 to 74, then 6 percent from 75 to 79, and so on.
This means that a man with an average balance at age-retirement age might have closer to $11,000 and a woman might have closer to $8,100, and then they would combine this with their age pension to estimate their attainable income.
A couple with an average income could add $18,100 with this conservative 5 percent decline rate. In fact, if the market is behaving well, there is plenty of research to support a 6 percent or even 7 percent decline rate in the early years of retirement.
On top of that, if you’re in good health and able-bodied, you may want to work a part-time or temporary job to supplement these income streams. You can earn up to $7800 a year without seeing your age pension reduced.
Once you understand the basics of age pension and pension, the next big problem is housing. And that’s big. Rental assistance for a retiree today typically only subsidies close to $220 per fortnight; This is not enough to rent a room in a major capital, let alone an apartment or townhouse.
That’s why it’s important to find housing that you can afford and offers long-term stability. And to achieve this, many people are leaving our capitals for second- and third-tier cities where rents are slightly lower, especially when work is not the reason for staying.
All of this is designed to help you earn a modest income that you can plan your life around. And this life is important.
Once your income is secure and you’ve determined how you can live within your means with relatively passive sources of income, your next task is to work on your health and focus on your happiness, fulfillment, and sense of purpose and belonging: these are real ways to have an epic retirement.
First of all, your health is simple and I want you to prioritize that. Focus on three things: good nutrition, regular exercise, and proactively preventing chronic diseases. Get a breast scan, test for bowel cancer, get regular dental checkups and monitor your blood pressure.
Then work on your sense of purpose. While working, you traded your time for money. You can now choose to do things that bring happiness and purpose, not money.
So I want you to take time to think about the things you enjoy doing and discover the skills you enjoy using at different times in your life. Write these down. Then think about the things you are passionate about; maybe it’s to help people; Maybe it’s your love of plants or animals or a cause you believe in.
Then, consider what your values need from you to align and begin to explore ways you can use your time, skills, and passions to realize your passions in the years ahead. Life may have thrown you some curveballs, but you can still make your retirement epic.
Bec Wilson is the bestselling author How to Have an Epic Retirement and new releases Prime Time: 27 Lessons for the New Middle Life. Writes a weekly newsletter epicretirement.net and hosts prime time podcast.
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Bec Wilson is the author of How to Have an Epic Retirement and writes a weekly newsletter for pre- and post-retirees at epicretirement.net.
