When to retire
Figuring out when to retire is more than just a question of when you would like to retire. You need to consider how much your planned retirement will cost and how many years your money needs to last.
There are guidelines you can use to make sure you are not retiring too early - and to calculate the full benefit of working a bit longer, even if it is only part-time. As with any significant financial decision, you should definitely seek professional advice prior to getting out of the workforce.
Key retirement ages
There are big taxation implications to be looked at if you are considering an early retirement. The key retirement ages for tax purposes are 55 and 60. This is because the taxation on lump sum withdrawals is significantly reduced once you reach preservation age.
Tax on lump sum withdrawals
||Tax on taxable component
||First $150,000 tax-free
Amounts above $150,000 taxed at 15% (plus Medicare levy)
|Under age 55
(current preservation age)
|20% (plus Medicare)
How many years you need to fund in retirement
Australians are living longer on average than in the past, and as a consequence we will have to stretch retirement savings further. The following table provides average remaining life expectancy, and will help you determine the number of years you may have in retirement. Your family history, current lifestyle and state of health can help you decide whether your lifespan is likely to be longer or shorter than the community averages shown here.
Remaining life expectancy
Source: Australian Bureau of Statistics, Life Expectancy Tables, Australia 2007-2009
How much money will you need?
The rule of thumb has always been that self-funded retirees need between 60 and 65% of their gross pre-retirement income to maintain their lifestyle. For more information about your annual requirements in retirement and how this equates to a lump sum, see How much super is enough?
Once you have worked out your annual retirement income, have a trial run at living on this amount. You could salary sacrifice the difference between your current wage and your proposed retirement income into your super, that way you test your retirement income and boost your super simultaneously.
How can you fund more retirement years?
In most circumstances, working an extra year will fund more than one retirement year.
This will depend on your situation - your age, how much you are earning and what you are contributing to super. But the principle that a little extra work pays for a lot more retirement should hold good.
Continuing to work full-time
Don had intended to retire last year, when he was 57. At that time he had super of $550,000. His gross salary was $76,650 and he and his wife Margi expect to spend about $46,000 a year (60% of his salary) in retirement. At that rate, if Don retired at 57 his savings would run out at 72.
After talking to a Telstra Super Financial Planning adviser, Don decided to keep working until he is 60 and trial his retirement income of $46,000 during this time.
This allows him to salary sacrifice an additional $16,150 annually into his super. His extra contributions, his Superannuation Guarantee (SG) contributions and compound interest over the next 3 years could increase his super to $727,593. This means that Don and Margi could begin with an income from his super of $50,265 pa ($46,000 pa adjusted for inflation) once Don retires at 60 and their money should last until Don is 80.
Cutting back to part-time
Terri has just turned 60. Her current super balance is $325,000. Her full time gross salary is $56,500. Terri has worked out she will need $34,000 a year in retirement. If Terri retired now her savings would last until she is 71. By working 3 days a week until age 65, Terry will earn $29,200 and will still receive $3,051 in SG contributions.
If she tops up her income from her super while she is working part-time to meet her $34,000 requirement, she could increase her super benefit at retirement to $416,804, which would last until she is 78.
Terri's strategy involves transitioning into retirement using a retirement income stream. For more information on this tax effective strategy visit Transition into retirement.
The examples above assume a 6.5% earning rate and 3.0% inflation, compounding is annual, net of fees and taxes. They do not allow for any Government assistance which may be available. Assumes no further withdrawals. Future performance is not guaranteed.
Working out when you should retire involves many considerations, so it can be a difficult decision to make. Given how few people make a comeback to the workforce after retiring, our advice is simple: stay at work long enough to consult a financial adviser and work out the full financial implications of retiring either sooner or later.
Telstra Super Financial Planning are here to help our members plan their retirements. To make an appointment, call Telstra Super on 1300 033 166 or request an appointment online.