Selecting a retirement age, even if you plan to continue some form of work during retirement, can be a difficult decision. In some cases, individuals don’t get a choice about when to retire due to health issues, or due to redundancy in later years and then difficulty finding another job.
Although life after work is so much more than a financial decision, it is often for financial reasons that individuals decide on a particular age for starting retirement. For most Australians, two important considerations when planning for retirement are:
- the age when you can access your super benefits; and
- the age when you can access the Age Pension.
Other important factors that affect the timing of your retirement include:
- how long you expect to live, and
- how much income you need each year.
Factors that may also influence your retirement date, and that you may not have much control over, include ill-health and redundancy.
How intentions may differ from reality
In December 2017, the Australian Bureau of Statistics (ABS) reported that 70% of the over-45s who participated in a 2016/2017 survey intended to retire at the age of 65 years or over, and more than one in five (20%) Australians over the age of 45 years intended to retire from work at age 70 years or older.
The average intended retirement age was 65 years (65.5 years for men and 64.4 years for women). Three years ago, the average intended retirement age was 63.5 years. Presumably the intended retirement age will increase again in the next survey as anyone born after June 1952 has an Age Pension age of at least 65.5 years (see later in the article for what this means).
According to the ABS, just over half (54%) of those surveyed about retirement intentions said they expected their main income in retirement would be ‘superannuation/annuity/allocated pension’, and a quarter (25%) of those intending to retire said a government allowance or pension would be the main source of income in retirement.
In contrast, those who had recently retired (within the past 5 years), around half (49%) stated that the ‘government pension or allowance’ was their main source of income at retirement.
A possible conclusion that you could make from this difference between pre-retirees and recent retirees, is that Australians retiring today, and in the future, will have more super than those who have recently retired. Alternatively, you could speculate that for recent retirees (within the past 5 years) the reality of funding a lifestyle in retirement has meant that superannuation savings are being spent more quickly than expected, and there is now a heavier reliance on the Age Pension than was expected before retiring.
Note: The survey highlighted an interesting statistic relating to women’s retirement incomes. According to the ABS survey, more women than men expected to rely on partner’s income (11%), compared to only 2% of men. For those already retired, 37% of women (compared with 9% of men) expected to rely on the partner’s income for living expenses.
This significant statistic serves as a warning sign for both political parties which allowed the recent change to the taxation rules on individual super pension balances, rather than recognising that a single pension account may be the source of retirement income for a couple (see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap).
Food for thought for the politicians moving towards the 2019 Federal Election, when Australians will have fully appreciated the complex and lifelong compliance obligations imposed by the new $1.6 million transfer balance cap (not to mention the harsh changes to the Age Pension assets test). For information about the Age Pension assets test changes, see SuperGuide article Retirementgate: Government’s Age Pension debacle hits middle Australia.
Before drawing a line in the sand regarding WHEN you plan to retire, consider the following questions:
- When can I access my super benefits?
- When can I claim the Age Pension?
- Life expectancy: How long can I expect to live?
- How much super (and other money) do I need to retire?
If you are not relying on your superannuation savings to finance your retirement, then you can retire at any age, assuming you have the financial resources to support yourself.
If you are relying on your superannuation benefits to fund your retirement, then you need to be aware that you must have reached a certain age before you can access your preserved superannuation benefits.
In normal circumstances, once you have reached what is known as your ‘preservation age’ PLUS you have retired, you can access your preserved superannuation benefits.
Preservation age varies depending on your date of birth, with the minimum preservation age being 55 years of age (for those born before July 1960), and progressively increasing to 60 years of age. If you were born on or after 1 July 1964, then your preservation age is 60 years of age. If you were born after 30 June 1960 but before July 1964, then your preservation age is 56, 57, 58 or 59 years. Those with a preservation age of 57 years are turning 57 during the 2018/2019 financial year. For more information about your preservation age see the following SuperGuide articles:
- Accessing super: What is my preservation age?
- Accessing super: Preservation age moves to 59 years
- Retirement Age Reckoner: Discover your preservation age and Age Pension age
When you turn 65, you can access your super benefits at any time, even if you continue working full-time.
Note: You can access your super benefits under other circumstances as well, although these circumstances are generally exceptions to the retirement rule (see SuperGuide article Accessing super early: 14 legal ways to withdraw your super benefits for other ways to access your super benefits).
If you are expecting to receive the Age Pension (FULL or PART pension) to help finance your retirement, you probably already realise that your Age Pension age becomes an important consideration when deciding when to retire. If you were born before July 1952, then your Age Pension age is 65 years (and in the past, women born before a certain date had an Age Pension age younger than 65 years). If you were born after December 1956, then your Age Pension age is 67 years.
If you were born on any date from 1 July 1952 through to 31 December 1956, then your Age Pension age is 65.5, 66 or 66.5 years. For more information on your Age Pension age see SuperGuide articles Age Pension age increasing to 67 years (not 70 years) and Retirement Age Reckoner: Discover your preservation age and Age Pension age.
Note: Since 1 July 2017, Age Pension age has increased to 65.5 years, and Age Pension age will increase to 66 years from July 2019.
Important: If you have reached your Age Pension age, and you meet the Age Pension income and assets test, then you will be eligible for a FULL or PART Age Pension (see SuperGuide articles Australian Age Pension: 10 important facts you should know and Australian Age Pension: Am I eligible and how do I apply?).
Your savings have to last for all of your life, not just for the first 10 or 15 years of your retirement. Even so, the Age Pension is generally a back-up if you run out of money, or perhaps a key component of your retirement plans.
The Australian Government Actuary releases life tables every 5 years (latest update was December 2014 to be updated again in December 2019), which outlines the average life expectancy for each age group from age zero to age 109, for females and for males. For example, if you retire at 65 years of age, then you can expect to live, on average, another 22 years, if you’re a female, and another 19 years if you’re a male.
If you retire at 55 years of age, then you can expect to live, on average, another 31 years if you’re a female, or another 28 years if you’re a male (see table below).
The longer you live, the longer you can expect to live in terms of life expectancy. At 55, a female’s life expectancy is 86.02 years (31.02 years to live), while at age 65, a female’s life expectancy is 87.05 years (22.05 years to live).
The earlier you retire, the more money you will need for your retirement because you will be funding a longer retirement timeframe. The later you retire, the smaller is the lump sum needed because you are funding a shorter retirement, on average.
The table below sets out the average life expectancies for 7 age groups. For a complete list of life expectancies see SuperGuide article Life expectancy: Will you outlive your retirement savings?
Average life expectancies: number of years to live on average from current age
|57||29.19 (age 86.19)||25.95 (age 82.95)|
|60||26.47 (age 86.47)||23.37 (age 83.37)|
|65||22.05 (age 87.05)||19.22 (age 84.22)|
|70||17.80 (age 87.80)||15.31 (age 85.31)|
|75||13.83 (age 88.83)||11.72 (age 86.72)|
|80||10.21 (age 90.21)||8.60 (age 88.60)|
|85||7.14 (age 92.14)||6.06 (age 91.06)|
Source: Compiled from Australian Life Tables, 2010-2012, Australian Government Actuary (www.aga.gov.au). Released 10 December 2014. Next update due in December 2019.
So, you have chosen your preferred retirement age taking into account when you can access your super benefits, and when you are eligible for the Age Pension (if applicable). You have determined your average life expectancy, and now you need to work out how much money you will need to finance your desired level of income for your expected lifespan in retirement, and perhaps also leave money for your family after you die.
You will also need to decide how you want your retirement savings invested in retirement and whether you want higher risk or lower risk investments, which will generally determine the long-term return on your retirement savings. If you can generate a higher investment return during retirement, then you can retire with a smaller lump sum on retirement for the same annual income, compared with a larger lump sum on retirement but a smaller annual investment return.
We take you through the steps necessary to work out how much is enough for your retirement in the following SuperGuide articles:
- Financial freedom: Retirement planning in six steps
- How much super do you need to retire comfortably?
- Retirement income: Living on more than $60,000 a year
- Retirement income: Want to live on $100,000 a year?
- Retirement income: Come on, how much super do I really need?
- How Much Super Is Enough Reckoner
- Crunching the numbers: a $1 million retirement (7% and 5% returns)
- Crunching the numbers: a $1.6 million retirement
- Low yields: A $1 million retirement on 3% or 2% returns
- Retirement Income Reckoner