Life is full of milestones, and retiring is one of the biggest. It’s a major transition in your life that will have a financial, social and physical impact on how you live the rest of your life.
So it’s important to start planning well in advance – ideally about 10 years before you’d like to retire, or start scaling back on paid work. Right now the average Australian intends to retire around the age of 65 according to the ABS1, but many plan to (or need to) work much longer to ensure they have more choices about how they spend the next few decades.
How much you’ll need in retirement will depend on your own circumstances and the type of lifestyle you’re after.
Once you reach your preservation age (60, for those born after June 30 1964), and retire, you can access your super. Before this point you need to decide whether you stop work and use your super to generate an income, work part-time and convert all or some of your super to a ‘pre-retirement pension’, or keep working to continue accumulating more super. Apart from considering any health and lifestyle issues, this decision will largely come down to whether you can comfortably afford to live the rest of your life (which could be another two or three decades) on your super (alongside any other assets and/or social security entitlements you may have).
What sort of retirement lifestyle would you like?
If your retirement plans include travel or new hobbies, you’ll need to take that into account in working out your required super balance. The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard benchmarks the annual budget you may need for a ‘comfortable’ or ‘modest’ retirement lifestyle.
A comfortable retirement would provide you with an annual holiday in Australia, regular meals out and new activities, and owning a reasonable car. To make that happen, a retired couple needs an annual income of $59,619 – which requires an investment balance, including your super but excluding your home, of $640,000.2
A modest retirement lifestyle may mean less frequent or cheaper meals out, short breaks closer to home and an older car. Most of that budget could be met by the aged pension, so you’d need much less in investments to retire – $34,560 for a couple.3
Transitioning to retirement
If you decide to work part-time, you can convert some of your super into a regular income stream by starting a ‘pre-retirement pension’, but still contribute to your super fund (through your employer’s compulsory super guarantee contributions, salary sacrifice, or personal contributions). You won’t be able to make any lump sum withdrawals until you’re fully retired.
Are you eligible for the Age Pension?
Depending on your income and assets, the Age Pension might be another way to supplement your income in retirement once you turn 65. However, if you’re planning to depend on the Age Pension, be prepared for a modest lifestyle in retirement – and less control over decisions about where and how you live. The qualifying age for the Age Pension will also continue to rise, reaching 67 by July 1 2023.4 For more information on the Age Pension rates and eligibility, visit the Department of Human Services website.
Types of income streams in retirement
Once you retire, there are a few different ways you can convert your super into income.
1. Account-based pensions (or Allocated pensions)
This is a regular income stream drawn from your superannuation savings. You must draw at least a minimum payment each year, which is based on your age. There’s no limit to how much you can withdraw, so as well as periodic payments you can also take out all or some of your super as a lump sum.
This type of pension will stop when your super runs out – it doesn’t guarantee an income for life.
Your dependants can receive any remaining account balance when you die.
It is extremely tax effective. All investment earnings are completely tax free – no tax on your pension income or capital gains. In fact, if some of your super is invested in Australian shares your super fund will also usually get a tax refund (refundable imputation credits), which can be used to further boost your fund earnings. Once you reach age 60, your pension payments are also tax free in most cases.
If you’d prefer the certainty of a fixed income for a defined period of time, or for the rest of your life, you can use your super (or other savings) to buy an annuity. These are also called lifetime or fixed-term annuities. You can choose the term of payments – for a fixed number of years or the rest of your life – and whether you want to receive payments monthly, quarterly, every six months or once a year. This income can also be indexed to increase each year as inflation rises. The ability to withdraw lump sums depends on the terms of the annuity.
If you die within your annuity period, there may be a few options (depending on the terms of your annuity) that allow annuity payments to fully or partially continue to your dependants or for a lump sum to be paid to your dependants or your estate. Speak to your annuity provider for more information on the options available to you.
Annuities purchased with money from your super are tax-free once you turn 60 but if you use non-super investments, part of each annuity payment (not investment earnings) will be taxable.
Not sure if you’re ready? Ask your adviser.
It’s important to feel confident you have enough retirement savings before you stop working. So if you’re not sure if you’re ready, a financial adviser can help. Whether your dreams for retirement involve travel, more time with the grandkids or a new home in a retirement village, you need to make a plan – and they can advise you on all the options you have available to make those dreams a reality.
1 Media release: Australians intend to work longer than ever before, Australian Bureau of Statistics, 29 March 2016
2 ASFA Retirement Standard, Association of Superannuation Funds of Australia September quarter 2016.
3 ASFA Retirement Standard, Association of Superannuation Funds of Australia September quarter 2016.
4 Department of Human Services, https://www.humanservices.gov.au/customer/services/centrelink/age-pension
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36.