Redefining what it means to retire

For many years, we have assumed that we can simply exchange our pay cheque from our employer to one from the government once we reach a magical retirement age.

This is the way it worked for a long time, but there is growing evidence that we need to redefine what it means to retire. Here are four reasons why.

1. The government keeps changing pension and superannuation rules

Currently, to receive the age pension you must be at least 65 and meet the 10-year qualifying Australian residence requirements. Income, assets and other circumstances also affect how much pension you will get.

From 1 July 2017, the qualifying age for the age pension will increase from 65 to 65.5 years. The qualifying age will then rise by six months every two years, reaching 67 by 1 July 2023.

The experience in Australia is by no means unique. Governments in the United Kingdom and Canada are also increasing the age at which their citizens can receive the age pension to 67. And other countries are sure to follow suit.

Also, compulsory superannuation is increasing from the current 9% of salary to 12% by 2017 to meet the government’s estimated funding shortfall, and there is talk about changing the rate at which superannuation is taxed for the wealthy.

Who knows what rules will change next? When our government talks about pillaging superannuation accounts to pay pensions you know that your retirement savings are only truly yours until the rules are next changed.

Perhaps it’s time to consider diversifying retirement savings a little, and there’s bound to be a growing industry dedicated to doing just that. The trick will be to separate the good investments from the bad to avoid being duped, and to get educated on the opportunities that do exist.

2. Longer retirement = more spare time

According to the Australian government, an Australian male born today can expect to live to 79 years, and a female to 85 years. These results place Australians in the top five countries in the world for life expectancies.

In 1900, life expectancy at birth was 55 years for males and 59 years for females. Over the course of a century, life expectancy has increased by over 20 years.

Given medical discoveries and health improvements, it is possible that our life expectancies will increase further in future.

This means that we can expect to have more free time on our hands after retiring, and the burning question will be what to do with it if we don’t want our mental and physical faculties to deteriorate.

We could choose to extend our working lives beyond the official retirement age, but our workforce may have other ideas and push us out. There may be more opportunities to work part time, or we could possibly start all over again in an industry that may only have been fledgling when we began our career journey.

The simple fact is that we can expect to spend at least 20 years in retirement, and this is a lot of spare time to cover, especially if you are still in good health and the kids have fled the roost.

Expect to see more initiatives for retirees to learn new skills, volunteer back to the community or being encouraged to stay on in the workforce.

3. You don’t have enough money to do all you want to do

You finally have the free time to do everything you wanted to do only to find that now you can’t afford to, and you are terrified of outliving your savings.

It would be wonderful to consider retirement as a long fully-paid vacation around the world, but the truth is that many of us will be struggling just to make ends meet.

Throw in another recession while you are in the throes of accessing your superannuation and a more comfortable lifestyle post retirement will remain just a dream.

Although sad to admit, many of us will be forced to live on less than we would like. But this doesn’t have to be as restrictive or demoralising as it sounds. The frugality movement has already gained significant momentum around the western world, and it may bring you significant pleasure to find new ways to spend less, grow your own veggies or even do your bit to save the planet.

The baby boomers have always been a resourceful lot, so don’t be surprised to see original ways to live comfortable lifestyles and meaningful lives as budget-busting living become the reality.

4. All or nothing is so old hat

There are strict but confusing definitions around when and how you can access your superannuation savings – as well as the government pension. As a result, many people find it easiest to choose “working” or “retirement” as convenient buckets to define their status – with no middle ground.

The expectations of our society for many decades have reinforced this acceptance we have that we will work until we retire, at which point we go from one extreme to the other.

The middle ground of working some of the time and retiring some of the time needs further exploration.

Wouldn’t it be great if it were easier to work regular part-time hours, or if you could job share so you work only three or four months each year then can travel for a few months and retire for the rest. Or even engage in some new work scheme that eases the government’s pension burden while giving you greater flexibility to take a break when you want one.

It would benefit society as a whole if we could find more flexibility in the middle ground between working and retiring, and it’s time we opened up this treasure chest to generate some new ideas.

Superannuation 101

If you are working in Australia as an employee, you would receive superannuation payments as part of your remuneration deal. So, in a nutshell, what is superannuation?

It’s your money – for your future. The Australian government understood how hard it was to get people to save on their own, so they legislated forced savings.

The hitch is that you can’t access it until you retire. And there are lots of complex rules that can and do change.

Here are some basics to get you started, and understanding these is the first step to getting control over your super.

Superannuation is a way of saving for your retirement

Both you and your employer can make contributions that accumulate over time and this money is then invested in shares, government bonds, property, or other appropriate investments.

Your employer pays 9% now, but will be required to pay 12% in July 2019

The Superannuation Guarantee, or the amount your employer pays, came into operation on 1 July 1992. Back then, employers became obliged to contribute 3% of your salary – excluding overtime, leave loading and fringe benefits – into your superannuation fund. This has steadily risen to the current 9%, and will increase again to 9.25% on 1 July 2013, then will eventually be 12% from July 2019.

Are any employees left out?

Yes, there are exceptions to paying the Superannuation Guarantee. Employers are not obliged to pay for:

• employees earning less than $450 per month
• employees under age 18 who work 30 hours per week or less
• employees aged 70 years or older
• anyone paid to do domestic or private work for 30 hours per week or less.

Gain tax advantages by paying extra

There are limits that affect how much you can contribute to superannuation, and these can  also change.

For 2013/14, everyone has a tax-advantaged concessional contributions cap of $25,000 that can be paid into super as employer contributions or personal contributions. Additionally, up to $150,000 can be paid into super without receiving tax concessions.

If you have money left over after your weekly expenses, and you want to save for the future, you may want to consider making superannuation contributions rather than other forms of investment.

I want to take out my superannuation

Generally, you can withdraw your superannuation only in these circumstances:

• you retire and reach preservation age (between the age of 60 or 55 depending on your date of birth)
• you have turned 65
• you qualify under the “transition to retirement” rules
• you suffer from a total and permanent disability
• you have a terminal illness and are under the age of 60
• you die, or
• you can show that there is severe financial hardship, or
• other compassionate grounds.

Can I get access to it all at once after I retire?

There are a few ways to get access to your money after your retire:

• If you withdraw money from your superannuation you can choose to receive this by lump sum or in the form of regular payments, like a pension.
• If the benefit is paid as a pension, your accumulated contributions are left in the fund, which uses it for reinvestment and the fund pays you regular pension-like payments.
• It’s also possible to take the lump sum and reinvest it somewhere else. If you do this, you can also be paid regular payments – this is often called an annuity.
• You can get an allocated pension, which is a pension that allows you to withdraw capital lump sums at any time.
• Another option is the transition-to-retirement scheme. This allows you to keep working after your preservation age and still access some of your superannuation. Make sure you get financial advice if you are contemplating this.

Want to find out more?

There is much, much more to superannuation, and the rules do change. We will take a closer look at aspects of superannuation in future posts, but you can also find out more at www.ato.gov.au. Or speak to a financial adviser about your personal circumstances.