I spent the latter half of this week at the Financial Counselling Australia conference, and it really brought something into focus for me. Many Australians aren’t retiring in comfort.
We don’t talk nearly enough about what retirement looks like – or how to plan for it – if you don’t have a lot of money. We also don’t rave about financial counsellors enough and how they help people in tough situations, or who are deep in debt, to get back on track.
We tend to talk about retirement as if it’s something people move into by choice, confidently and with excitement. You’re expected to build up your super, pay off your home and step away from work with a fair bit of control over what comes next.
But that’s not how it’s playing out for everyone right now. In fact, close to half of Australians retiring today rely on the age pension for a significant part of their income, and only a third or so retire by choice.
So what does retirement planning look like for people who don’t have “enough”, who didn’t get the chance to plan or who step away from work because their health shifts or caring responsibilities take over?
In that world, it’s not about optimising your retirement and choosing the date. It’s about learning to live with choices that may have been forced upon you and making the best of the opportunities you do have.
It’s not so much about how much super you have as a lump sum, but how much income that generates, and what you choose to draw down.
Rebuilding your financial confidence is the first step, and the best way to do that is to understand how the financial systems that support retirement work, and how much money you can rely on coming in from passive income sources such as the age pension or superannuation.
The age pension in Australia can be accessed from 67 years of age if you pass the assets and income test. It pays $31,223 a year for single people and $47,070 a year for couples at present, acting as the base layer of income that many people lean on in their later years.
Alongside this, they could add rent assistance, and the benefits from the pensioner concession card that every pensioner can access. If you’re caring for a loved one full-time and have not turned 67, you may be able to access the Carer Payment and concessions, a similar amount to the age pension.
Then you look at how you can combine the age pension or other benefits with income from your super fund if you’re over 60.
The median super balance for people aged 60-64 in Australia is $219,773 for men and $163,218 for women. But it’s less about how much super you have as a lump sum than how much income that generates, and what you choose to draw down each year. That’s the important calculation – and the one that will build confidence in your situation.
In retirement, the income from super on balances up to $2 million is tax-free once you move your super into a retirement phase account – an investment account that you must physically open with your super fund and deposit the funds into.
This is important to know because it is fundamentally different from how income works when you’re working. The wage you planned around when you were working was pre-tax, or gross, income so most people in the workforce lose 30-35 per cent or more of their income in tax before they start spending on the cost of living. In retirement, your income from the age pension sits below the tax-free threshold, and the income from a small super balance is tax-free.
You can access your super from the age of 60, if you cease a role or are unemployed, or 65 if you’re working. If you’re still working between 60 and 65, you can access a transition-to-retirement strategy that allows you to draw out up to 10 per cent of your super each year, tax-free, as an income stream.
This can be used in some clever ways: to supplement a part-time job that might not earn you enough to pay all your living costs, for instance; or, to contribute actively into super, leveraging the lower tax – 15 per cent – contribution rate on the first $30,000 of concessional contributions each year. All drawing out the income through the retirement system, tax-free.
Once your super is in the retirement phase, you have to draw down a percentage of the balance based on your age. It starts at 4 per cent of the balance up to the age of 65, then rises to 5 per cent from 65 to 74, then 6 per cent from 75 to 79, and so on.
That means a man with a median balance at age-pension age could be drawing close to $11,000, and a woman $8100, and then they’d combine this with the age pension to estimate their accessible income.
A couple with median incomes might be able to add $18,100 at that conservative 5 per cent drawdown rate. In fact, there’s quite a bit of research to support a drawdown rate of 6 per cent or even 7 per cent in the early years of retirement, if the market is behaving well.
On top of this, if you’re in good health and able, you might want to work a part-time or casual job to supplement these income streams. You can earn up to $7800 a year without seeing your age pension tapered.
Once you’ve grasped the basics of the age pension and super, housing is the next big issue. And it is big. Rent assistance for someone in retirement today usually offers a subsidy of close to only $220 a fortnight – not even enough to make a dent on renting a room in a major capital city, let alone an entire flat or townhouse.
So finding housing that you can afford and that offers long-term stability is important. And to achieve this, many people leave our capitals for second- and third-tier cities where rents are a little lower, particularly when work is not the reason to stay.
All these things are designed to help you secure a modest income that you can plan your life around. And that life is important.
Once your income is secure, and you’ve established how you can live within your means on relatively passive income sources, the next job to do is work on your health – and focus on your happiness, fulfilment, sense of purpose and belonging: these are the real ways to have an epic retirement.
First, your health is simple, and I want you to prioritise it. Focus on three things: good nutrition, regular exercise, and proactively preventing chronic disease. Get a breast scan, do the bowel cancer test, get regular dental checks, and watch your blood pressure.
Then, work on your sense of purpose. When you worked, you traded time for money. Now you get to choose to do things that don’t pay in dollars but in happiness and purpose.
So I want you to take time to think about what you enjoy doing, and to explore the skills that you’ve enjoyed using at different times in your life. Write them down. Then think about the things you’re passionate about – maybe that’s helping people; perhaps it’s a love of plants or animals, or a cause you believe in.
Then, consider what your values need from you to be aligned, and start exploring ways you could use your time, skills and passions in the years ahead for fulfilment. Life might have thrown you some curveballs, but you can still make your retirement epic.
Bec Wilson is author of the bestseller How to Have an Epic Retirement and the newly released Prime Time: 27 Lessons for the New Midlife. She writes a weekly newsletter at epicretirement.net and hosts the Prime Time podcast.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own 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.
