On this page
- 1. Keeping your super in accumulation phase
- 2. Misunderstanding eligibility for the Age Pension
- 3. Not applying for relevant concessions cards
- 4. Forgetting to factor in healthcare costs
- 5. Underestimating how long you will live
- 6. The impact of inflation
- 7. Cashing out all your superannuation
- 8. Sequencing risk
- The bottom line
Over 1 million Australian retirees are potentially making a retirement mistake that could cost them thousands of dollars.
According to analysis of APRA data by Challenger Limited’s head of retirement income Aaron Minney, as of June 2023 just over 1.4 million member accounts of people aged over 65 were still in accumulation phase, when they could have been in retirement phase and not paying unnecessary tax.
Analysis by Class in its 2023 Annual Benchmark report finds that close to one in two members of APRA-regulated large superannuation funds aged 65 and over still have their entire balance in accumulation phase.
Fortunately, SMSF trustees are a little more aware of this potential mistake and only one in eight Class SMSF members over 65 had their entire balance in accumulation.
Not all retirement mistakes will be as costly as this one but it’s important to be aware of what could go wrong so you start your retirement journey on the right track.
1. Keeping your super in accumulation phase
As outlined above, not moving your superannuation from accumulation phase into retirement phase as soon as you are eligible means you will be paying 15% tax on your superannuation earnings when you could be paying zero.
Challenger analysis of the APRA data found that there was $255 billion in the 1.4 million member accounts that could potentially be shifted into retirement phase.
“These are large potential costs,” Minney says.
He stresses that there might be valid reasons why members leave money in an accumulation account. For example, some people are still working and receiving or making contributions, and others have more than $1.9 million in super so they can’t move it all into the retirement phase.
“While there are some reasons people leave money in the savings phase (ATO data indicates around 500,000 people over 65 had employer contributions into super in 2021), for many people the reason will be ignorance of the missing benefit,” he says.
2. Misunderstanding eligibility for the Age Pension
Another mistake that some make when planning for retirement is to misunderstand their eligibility for the Age Pension. While it’s true if you have a decent amount in your super account you may not be eligible for the full pension, you may still be eligible for a part pension if you have assets below the amounts in the table below at any time during your retirement.
So, as you draw down on your assets over the course of your retirement, you might become eligible to receive a part or even full pension. It’s very important that retirees realise this and don’t assume their Age Pension eligibility is fixed at the point they retire. It’s also important to update Centrelink as your balance decreases so you can get any Age Pension entitlements you might be eligible for.
And with any amount of part pension you will also be eligible for discounted medical expenses, utility bills and transport, which can greatly reduce your expenses.
Asset level at which pension completely cuts out
Your situation | Homeowner | Non-homeowner |
---|---|---|
A couple, combined | $1,003,000 | $1,245,000 |
A couple, separated due to illness, combined | $1,183,000 | $1,425,000 |
Source: Services NSW
There are also income tests you must not exceed. But these limits may also be higher than you expected. For example, while the income cut off for a full pension for a couple combined is $360 per fortnight, for a part pension it is $3,666.80 a fortnight.
The amount of Age Pension you are eligible to receive will be the lower amount after applying the assets and income tests.
3. Not applying for relevant concessions cards
Even if you’re not receiving any Age Pension and are ineligible for the Age Pension concession card, there are other senior’s cards you may be eligible for.
Each state often has its own version of a senior’s card but there is also the Commonwealth Seniors Health Card (CSHC) for anyone who has reached their age pension eligibility age and met a number of criteria, including a generous annual income test.
The CSHC entitles you to cheaper medicines, bulk-billed doctor visits and a larger Medicare refund on medical costs when you reach the Medicare Safety Net.
Learn more about the CSHC and other concession cards. And you can always ask for a senior’s discount wherever you go. You may or may not get it, but you won’t know if you don’t ask.
4. Forgetting to factor in healthcare costs
It’s easy to forget that you won’t be as fit as you are at 65 by the time you turn 85. Or even if you are planning for your health to decline as you age, it’s hard to predict how that will unfold. Will you need to adapt your home as your mobility decreases, for example, or will you need other kinds of help in the home?
There are government aged care packages that can accommodate some reduction in mobility and other higher care needs, but they can be hard to get. And, like most things, if you want better care you may need to pay for it.
The Association of Superannuation Funds of Australia’s (ASFA) retirement income standard estimates that healthcare costs (which includes health insurance, pharmacy, co-payment and out-of-pocket medical expenses and over-the-counter medicines) increase from 15% of weekly expenditure for a 65–84-year-old couple enjoying a comfortable retirement to nearly 20% of weekly expenditure once they hit 85.
So, it’s important to keep these costs in mind as you plan for retirement and potentially keep a buffer for any home accommodations you may need.
5. Underestimating how long you will live
According to the latest data from the Australian Institute of Health and Welfare, a man aged 65 in 2019–21 could expect to live another 20.3 years (to age 85), while a woman aged 65 in 2019–21 could expect to live another 23 years (to age 88). That means most people retiring today at age 65 can expect to live at least another twenty years. But what a lot of people forget is that these numbers are averages; half of this group will live beyond age 85.
For example, the AIHW tables show that if a male did manage to make it to 85 years old in 2019–21, their life expectancy at that point was 91.6 years. For a woman aged 85 in 2019–21, their life expectancy was 92.7 years.
If you retire at 65 you may need your super and other retirement savings to last for close to thirty years. And if you don’t want to live solely on the Age Pension, you need to put in place contingencies for your super to last as long as you do.
6. The impact of inflation
In the past few years, inflation has reared its ugly head again. Although, thankfully, it appears to be falling from its highs of nearly 8% in 2022, and is now much closer to 4%, it still has real potential to upset retirement plans by eroding the value of money you have worked so hard to save.
The ASFA retirement income standard shows a couple who wanted to retire comfortably in the September 2023 quarter would have needed $71,723.56 per year, which is a substantial increase on the $68,014 needed just 12 months prior and the $63,799 needed the year before that.
7. Cashing out all your superannuation
It can be very tempting when you are eligible to finally access your super to want to withdraw it all at once. If you have a decent sized balance, you can probably imagine all the wonderful things you could do with those thousands and potentially hundreds of thousands of dollars – world cruises, a new car and caravan and maybe even buying more property.
But you need to remember that this is money that is supposed to provide a retirement income and while there will be the Age Pension to fall back on (if you’re old enough) how comfortable do you think you would be living on a maximum fortnightly single pension of $1,096.70 and $1,653.40 for couples? That doesn’t come close to the $1,953.30 per fortnight that ASFA says a couple needs for even a modest retirement.
8. Sequencing risk
People retiring today in the 60s should be reasonably familiar with market crashes and crises. They’ve lived through the global financial crisis as well as the tech wreck of 2000 and the 1987 Wall Street crash. But nobody has a crystal ball when it comes to markets, so all retirees face sequencing risk, which is very difficult to plan for.
Sequencing risk refers to the potential for retiring at a poor time in the sequence of investment market returns. Markets move in cycles but if the year in which you plan to retire coincides with a market downturn, there is a real possibility you will retire with less than you originally planned for, as many retirees discovered during the GFC.
Many ended up delaying retirement and working for longer than they originally intended. While this isn’t ideal, it is one way to deal with sequencing risk. Another way is to shift your asset allocation to a more defensive setting the closer you get to retirement to protect your balance from share market risk.
The bottom line
As you get closer to retirement, it’s important to understand all the financial benefits and services you may be eligible for, and avoid making any of the other common mistakes outlined above.
It’s recommended you try and plan for a range of outcomes, while also considering non-financial factors such as your health.
Leave a comment
You must be a SuperGuide member and logged in to add a comment or question.