How to measure the financial impact of delaying retirement

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Benefits of delaying retirement
The alternative – saving more to retire sooner
How long could retirement be?
The bottom line

If you’re thinking of retiring soon you might be wondering about the difference a few extra years in the workforce could make. Should you stick it out a bit longer, or focus on saving as much as possible now and plan to stop work sooner?

Timing your retirement is not a simple decision, so read on to discover the factors you may need to think about.

Benefits of delaying retirement

The downside of putting off retirement is clear – you spend longer working, and less time enjoying your retirement! Even so, there are some good reasons working longer might be worth considering.

The longer you remain employed, the more time your super and other savings have to accumulate before you start drawing retirement income.

At the same time, the nest egg you need will be smaller because you won’t need to finance so many years in retirement. If you’re concerned you haven’t saved enough, staying in the workforce a little longer might be just the ticket.

If you’re likely to be eligible for some Age Pension, it could be worth continuing to work until you reach your Age Pension age, which increased to 67 from 1 July 2023.

If you’re close to your pension age when you retire, or better yet have already reached it, you’ll minimise the amount you need to draw from your own savings while you’re waiting for your entitlements to come through.

The alternative – saving more to retire sooner

If staying at work doesn’t appeal, but you’ve got some extra to save, a savings sprint before retirement could give you the boost you need.

You could be eligible to contribute more than the usual contribution caps using carry-forward concessional contributions or the bring-forward rule for non-concessional contributions.

The more you can accumulate in the concessionally taxed super environment the longer your savings should last. After retirement, super savings that you have converted into an income stream earn tax-free returns, boosting your investment return compared with investments outside the system.

How long could retirement be?

No one likes to think about their own mortality, but it’s essential to consider how long we might live to estimate the time our retirement savings need to last. Australians are living longer and healthier lives than ever, so your retirement might be longer than you think.

While retirement at age 60 is a popular goal, today’s 60-year-olds could end up living almost as long in retirement as they spent in the workforce. That’s a long time to expect your savings to last.

A long life expectancy could be a good reason to keep working for more years than you originally planned. The LifeSpan calculator provided to SuperGuide readers by Optimum Pensions is a comprehensive tool you can use to estimate the length of your retirement.

The next step is to work out how far your savings are likely to stretch, given your preferred retirement age and financial situation.

Case study: Roberta

Roberta is single, 55 years old, has $250,000 in super and earns an annual salary of $90,000. She is considering working until 67 but has recently paid off her mortgage and could afford to save extra in super if it would help her retire sooner.

Roberta decides to compare what her retirement may look like in two scenarios.

Salary sacrifice $1,500 per month ($18,000 per year) and retire at 62
Make no additional super savings and retire at 67

In the second scenario, Roberta would plan to use her extra saving capacity to help her daughter with debt instead of contributing to super. Using ASIC’s Moneysmart retirement planner we can model the outcomes.

	Contribute and retire at 62	No super contributions and retire at 67
Final super balance	$474,918	$447,538
Estimated retirement income*	$49,334	$51,967

Results from the ASIC Moneysmart retirement planner March 2023

* Estimated retirement income to age 92 including Age Pension entitlements. This and other assumptions about fees and investment returns can be altered to align with your personal circumstances and preferences

Roberta is interested to see that her final super balance is predicted to be higher if she contributes and retires early, but her retirement income will be be lower. This is because the balance needs to last five years longer and she will be fully self-funded for five years until her Age Pension kicks in.

According to the modelling, working longer has such a powerful effect that it outweighs the benefit of $126,000 of additional contributions over the seven years leading up to early retirement.

If Roberta were to make additional contributions AND work to age 67, her retirement income would be even higher. It all depends on how much you think you will need to live well in retirement and your more immediate financial priorities.

The bottom line

Timing retirement is a very personal choice, and not always in our control, but estimating the length of your retirement and doing some modelling is a good place to start.

Our detailed video demonstrations can help you to use the Moneysmart Retirement Planner and TelstraSuper Retirement Lifestyle Planner to predict your retirement income.

Delaying retirement can help if you haven’t managed to save the amount that would make you comfortable, or a final savings sprint could allow you to make the transition sooner. A combination of both strategies (delaying retirement and boosting contributions) would be even more effective, so be sure to crunch your numbers before making a final decision.