When can I retire?

When it comes to talking about retirement, it surprises me how often I hear people say things such as ‘the government won’t let me retire until I’m 65’. Or, ‘by the time we’re ready to retire, they’ll have pushed it back to 70’.

But there’s no reason to assume that your retirement age will be the same as your superannuation preservation age or your pension eligibility age.

Preservation and pension age

Many young people (including myself at times) have bemoaned the fact the preservation age for superannuation (the age at which you can access the funds you have saved) and the qualifying ages for the age pension are steadily increasing.

Although in this post I will focus on the situation in Australia, it is a common issue in many countries around the world. Even those with very different economic histories. Speaking to some friends in Poland, I learned that just as in Australia, where many retirees are struggling without enough super, because super wasn’t introduced until relatively late in their working life, the same is true of older workers in Poland, who started working under communism, a system in which retirement was considered the responsibility of the collective, not the individual.

In Australia, if you were born before 1960, you will have already reached superannuation preservation age upon the milestone of your 55th birthday. For those born later, however, the age increases, up to 60, for those born after 1964.

Since 1990, the age pension qualifying age in Australia for women has gradually been raised from 60 to 65. This brings it into line with men’s qualifying age, which I readily support. From this year, until 2023, the age will rise for both men and women from 65 to 67, affecting anyone born after 1956.

It’s not all bad news…

But something I haven’t heard any of us complaining about is our increased life expectancy.

Those born in the 1950s and 60s in Australia had, at birth, an average life expectancy of 67 for men, and 73 for women. (If you are in this age group, don’t panic: the odds get better the longer you survive. If you make it to 65, you can expect to live to around 79 for men, and 87 for women).

By the early 2000s, however, at birth males could expect to live to 79, and females to 83. And if those kids live to 65, they’ll have average lifespans of 98 and 105 to look forward to. This is enormous.

An increase in life expectancy of 18 or 19 years makes working an extra two to seven years seem pretty paltry.

Retirement age

Yet there’s no reason to allow these figures to dictate your retirement planning in any case.

After all, it’s no good expecting to retire solely because you’ve reached your preservation age, only to find out you don’t have enough superannuation. Or, to reach pension age, only to find you’re not eligible.

And the evidence suggests that most people don’t retire because they’ve reached preservation age. Or because they have become eligible for the pension. The average age of retirement for those aged over 45 is 54 years old. This is younger than either the lowest preservation or pension age. And this statistic doesn’t include those who retired in their 20s, 30s, or early 40s. So the true average is likely to be slightly younger still.

The ‘average’ retirement

In brief, the ‘average’ retirement up to this point has not been a straightforward case of ‘Happy 65th birthday, here’s your gold watch, go home’. Rather, it’s more likely to have involved permanently leaving work at 54 (possibly after a period of reduced workload). Gaining access to super at 55. And then potentially receiving a pension at 60 or 65.

So it’s important to watch what you say. Don’t talk yourself into the idea that the government – through pension or super rules – will decide your fate. Really, it’s in your hands.

The role of superannuation and the pension

Superannuation and the pension are an important tool and safety net, respectively, in financing your post-work needs. But they are by no means the only option. Indeed, if most Australians are retiring before they can access either, obviously they have made some alternative savings or investments.

Even though we’re constantly told you can’t rely on the pension to be there in your old age, as those who planned on retiring around the GFC found out only too well, you can’t necessarily rely on all of your super being their to greet you either. As in most financial endeavours, it pays to have a bit of diversification. Don’t put all your eggs in one basket.

How much do I need?

You’ve probably heard or read that you’ll need 75% of your pre-retirement income to retire.

And it’s also often said you will need some enormous figure, like $1 million or $2 million in superannuation.

Both are wrong. They are far too general to be of any real use in retirement planning.

In a previous post, I pointed out that how much you need to spend is not related to how much you earn.

If I earn $20,000 a year and spend $15,000 to feed, clothe and house myself, my expenses will not automatically go up if I receive a raise to $25,000. Many people do end up spending more. But this is mainly due to lifestyle inflation, not because the cost of basics have actually gone up that much. On the other hand, if you currently earn $15,000 and cannot cut your budget back further, it’s unlikely you’ll be able to get away with 75% of your current earnings in retirement.

Some people currently spend 10% of their income. Some spend 110%. While we can all tweak our budgets somewhat, it is unlikely 75% will be the right figure for everyone.

The reason the second estimate is misleading is because it doesn’t take into account your net worth. $1 or $2 million sounds like a lot of money. And it is.

But if you have a substantial debt, it may not be enough.

Home ownership and a comfortable retirement

According to Bouris, author of The Yellow Brick Road To Your Financial Security, most Australians have two great dreams:

“owning their own home and having a comfortable retirement. These two dreams form the bookends of many Australians’ true financial focus”.

But sometimes, one of these dreams can get in the way of the other.

Retiring with a mortgage – a worrying trend

Superannuation and similar retirement savings initiatives involve the government giving workers certain incentives (such as tax breaks, and on occasion, co-contributions) to encourage investments that will (in theory) relieve some of the burden from the state later on. In exchange, workers who invest their money in superannuation forego certain freedoms that investors in other financial products usually have (such as the ability to access their money when they want).

I say ‘in theory’ in part because superannuation, despite being government mandated, is controlled by private enterprises in Australia. Further, it is not a straightforward savings scheme but an investment which carries risk. Unlike personal bank accounts, which in Australia are guaranteed by the government in the case of bank failure (up to $250,000), superannuation accounts carry no such guarantee.

Furthermore, the government and some funds permit the withdrawal of superannuation as a lump sum.

This becomes problematic when homeowners retire with a substantial mortgage – or other debts.

In the previous post in this series, we looked at the question ‘When should I pay off my mortgage?‘ Part of your answer should take into account when you plan on retiring, and with how much.

Australians have had easy access to credit in the form of credit cards since the 1970s, when many baby boomers were coming of age. This generation borrowed record amounts of money. According to the Australian Institute of Superannuation Trustees, over half of retirees take their super as a lump sum. And often, it’s to pay off credit cards and mortgages.

Investing in assets

Imagine our friends Abby and Bobbie retire at age 60. They borrowed money throughout their younger years to fund their business (which they have now transitioned the management of), buy an investment property, and put some money in a managed fund. (Some of these options are now available inside of super, but let’s assume that they did all of it outside, without the tax benefits). They have a small home with a fully paid off mortgage. Once they take their superannuation lump sum, they are debt free and able to live off of the income of their diversified portfolio.

… vs. spending on junk

Gabby and Halley, on the other hand, borrowed money not to invest for the future, but to finance regular takeaway. Restaurant meals. Cigarettes. Movie tickets. Tours. Alcohol. Extravagant holidays, and other outings on their credit card, as well as updating their cars and their wardrobes every couple of years. They have a home the same size and value as Abby and Bobby’s. But as they’ve always been struggling to make their credit card payments, they’ve consolidated and refinanced their mortgage several times. Each time they do this, the term of the mortgage is extended in order to permit them lower payments.

As they’ve never made more than the minimum payments, Gabby and Halley retire with a large mortgage. With no work income coming in, they can no longer service it. They take their super as a lump sum, paying off their mortgage and the remaining balance on their credit cards.

Like Abby and Bobby, they are now debt free. But unlike Abby and Bobby, they have no income, and no savings. Nor have they learned to live within their means, let alone to save any part of their income. Gabby and Halley constantly spent more than they earned. Just breaking even is a struggle for them, and living off of 75% of their former income is next to impossible with all the contracts and subscriptions and hire-purchase schemes they have bought into. In spite of their many years of paying into superannuation as required by the government, they have not prepared for the future.

How this affects the pension

If Abby and Bobby were to apply for pensions, in all likelihood they would be rejected – and rightly so. Their assets and income are sufficient for them to have a comfortable retirement without it.

However, Gabby and Halley, who might have earned the same amount as Abby and Bobby, worked the same number of years, and saved the same amount of super, will need to rely on a government income because of the spending decisions they have made.

Had they purchased a holiday home instead of buying flights on credit, or had they bought a classic vehicle instead of frequently updating their cars, it might be a different story.

But what Gabby and Halley spent their money on cannot be repossessed, or sold, or used to derive an income. The cigarettes they smoked. The expensive meals they ate. The movies they watched. None of any tangible value to anyone now. Even their cars and clothes are of limited scrap value.

In short, Gabby and Halley had sufficient income to prepare for their retirement, but chose not to. The way in which superannuation is structured currently in no way dissuades this kind of behaviour. Nor are Abby and Bobby rewarded for their prudence.

We have the power

My point is not to vilify those who through necessity must rely on government payments, but to defend them. When people live the high life on credit and then rely on the public to pay for their needs in retirement, it diverts much needed money away from those who did not have the opportunity to prepare for retirement in the same way, because of unemployment, disability or illness, family responsibilities or other hardships.

Superannuation does not in and of itself take pressure off of the government to support retirees. Rather, responsible retirement planning (either through super or otherwise), and avoidance of debt (especially consumer debt) by individuals wherever possible does.

There are other reasons that avoiding debt is important. Especially as you approach reirement.

Saving for a rainy day…

Imagine that Abby and Bobby, and Gabby and Halley had some unpredictable bad luck in the timing of their retirement, through no fault of their own. If, like happened to so many in the wake of the GFC, they lost half of their superannuation balance.

Abby and Bobby might choose to leave their money where it is to recover. Their own individually held shares have also made losses. But fortunately for them, their business is still running well, and they still have a tenant in their investment property. They also rent out a room of their house to make up for some of the lost income from their shares, and they’re still able to service their debts and live. Of course, this assumes that Abby and Bobby haven’t borrowed too much.

Gabby and Halley, on the other hand, have no alternative income streams. They cannot pay their mortgage, and are evicted from their home. They end up living in their car, now worth only a tiny fraction of its showroom value, with their suitcases full of clothes, on a government pension.

So how much do I need?

One reason I encourage everyone to know their net worth is to make better decisions about debt. In Australia, interest on loans for investment purposes is tax deductible. But there is no such advantage available to home owners. I can’t really think of any circumstances in which it is beneficial for home owners to pay the bank more interest.

The answer to ‘when can I retire?‘ and ‘how much do I need?‘ are highly individual, and no blog post or book or seminar can possibly answer that. In fact, I would recommend you avoid any source that confidently declares you will need $1 million, or that you will need 75% of your income, without specifying that these are merely averages and estimates, not hard and fast rules.

Although I certainly can’t answer these questions for you, I hope I’ve convinced you that when you retire is not a matter of attaining an age specified by the government. Nor is how much you need a matter of attaining an arbitrary sum of money. It’s an interaction between your:

  • ability and desire to continue working,
  • net worth,
  • budget, and
  • your superannuation and pension eligibility.

Of these factors, the only two over which you really have any control are your net worth, and your budget. Try to maximise the former and minimise the latter 🙂

When do you plan on retiring? Let me know below!

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