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.

Can I withdraw my super as a lump sum?

Question 

I am not yet 60 but have reached my preservation age and have retired. I would like to take out a lump sum from my superannuation to pay out the mortgage.

Can I do this now or do I have to wait until I turn 60?

Answer

Superannuation is a way of saving for your retirement. Your contributions accumulate over time and, usually, superannuation benefits are not available until you reach retirement age and have retired. This will be between ages 55 and 60, depending on your date of birth.

Date of birth                                   Preservation age
Before 1 July 1960                            55
1 July 1960 – 30 June 1961               56
1 July 1961 – 30 June 1962               57
1 July 1962 – 30 June 1963               58
1 July 1963 – 30 June 1964               59
From 1 July 1964                              60

As you have reached your preservation age and have retired, you can receive your superannuation as a lump sum payment, but there are different tax treatments depending on the amount.

If you access your super before age 60 you may be required to pay tax on withdrawals. You can withdraw tax-free up to the “low rate threshold”, currently $175,000 for the 2012/13 year, and $180,000 for 2012/14. This is a lifetime limit and is indexed annually. Any lump sums you withdraw before age 60 above this low rate threshold will be taxed at 16.5% (including Medicare Levy).

Once you reach age 60, any withdrawals – whether lump sum or pension – from a taxed super fund are tax-free. So it may be prudent to wait until after this age if you’d like to withdraw more than the low rate threshold as a lump sum.

So, while it looks like you can access a lump sum now, you need to understand that this may not necessarily be the best strategy for you.

It’s highly recommended that you seek financial advice before making a decision to withdraw any funds from your super.

Retirement savings around the world

Medical advancements may be leading to longer life expectancies, but how are your retirement savings keeping up?

Australians are expected to live longer than most other people in the world. The United Nations in 2010 ranked Australia in fourth place for life expectancy around the world. Males are expected to make it to 79 years, and females to nearly 84. Mildly ahead of Australia are only Japan, Switzerland and Hong Kong.

A study from HSBC in February this year shows that our retirement savings are not keeping up. On average, it found that people around the world have a 44% shortfall in their retirement savings. Australia is ranked seventh in terms of shortfall, with retirement expected to last for 21 years but retirement savings only for 10.

Worldwide, the study found that people will generally run out of retirement savings just over half way into their retirement. The United Kingdom has one of the largest shortfalls, with retirement expected to last for 19 years but the average person’s retirement will last for just seven, and the US is ranked thirteenth.

Source: The Telegraph, UK 

In September 2012, the Financial Services Council in Australia announced a $1 trillion expected shortfall in retirement savings for Australians who live longer than life expectancy. To meet this shortfall, they are recommending the government bring forward the legislated 12% compulsory superannuation contributions, which are intended to take effect in mid-2019.

Putting it all together, Australians can expect to have a shortfall in retirement. But there are a few things you can do now to help bridge this gap.

1. Work longer, retire later

From 1 July 2017, the qualifying age for the age pension will increase from 65 years to 65 and a half years. The qualifying age will then rise by six months every two years, reaching 67 by 1 July 2023, however will remain at 65 for anyone born before July 1952.

Whether you like it or not, the government is expecting you to work longer before they will pay you a pension.

2. Eliminate your debts

Pay off your debts sooner. This includes credit cards, personal loans, car loans and even your mortgage. The less you have going out to pay these debts, the more you have as disposable income and more you can save.

3. Live frugally

Learning to live on less now will make the transition easier when it comes time to officially retire. Do you really need another pair of jeans to add to the pile of 10 already in your wardrobe? And rather than eating out at fancy restaurants twice a week, learn to cook gourmet meals and only eat out only once a week. There are many things you can do now to reduce your outgoings.

4. Develop new skills

According to HSBC, Australians can expect to spend 21 years in retirement. You may find that there are only so many rounds of golf you can do in this time so you may need to find other interests to occupy your time, and keep your body and mind active. Why not develop some new skills that could bring in extra cash or boost your enthusiasm for life? It’s never too late to study a new interest or take up a new hobby. You may even be able to generate an income from it.

5. Save more

Increase your contributions to super and savings as early as you can to get the benefits of compounding. Decide on a regular amount and have it deducted automatically from your pay or bank account before you get the temptation to spend it. You won’t miss it if you don’t see it in the first place.

The looming pensions crisis and the OECD solution

Millions of workers who think pensions will secure their future could find themselves facing poverty in retirement.

In particular, the Australian federal government admitted in March 2013 that their unfunded superannuation liability for politicians, judges, public servants and military personnel is $200 billion and increasing.

An unfunded liability is one that does not have the savings set aside to pay for it. This shortfall is estimated to be more than 2.5 times the assets in the Future Fund that was set up by the Howard government to help fund these liabilities. An even more serious problem is that the outstanding liabilities are growing much faster than the economy.

Compared with the cost of private annuities, all Australian government pension funds represent open-ended cheque books written by the taxpayer. But this problem is not limited to government employees; it extends to the pensions the government is expected to pay all citizens once they reach retirement age. How can they pay pensions when they don’t have the money?

Our government has underestimated how quickly average lifespans are rising – and this is not a problem unique to Australia. Ageing societies and serious deficits have also been identified in the US, UK, Europe and Asia.

So what can be done to prevent the looming pensions crisis?

The Organisation for Economic Co-operation and Development (OECD) has been researching exactly this, and say that extending working lives provides the basis of necessary social reform to address this crisis. They say if nothing is done quickly to extend working lives, living standards will fall in the course of coming decades.

We know, because of the ageing of our populations, that there will be fewer and fewer persons of working age to support more and more older people. For the OECD as a whole, the dependence ratio of older people (those aged 65 and over as a proportion of those aged 20-64) will rise from the current figure of 22%, to 46% in 2050. In these circumstances, the OECD says it is essential to have as many people working as possible – young people, women and especially older workers.

Most countries have considerable room to increase the employment rate of persons between age 55 and 64. The average rate in the OECD is currently 48% – varying from 25% or less in France and Belgium, to 70% in Switzerland.

They also recommend that governments eliminate provisions that subsidise early withdrawal from active life – first and foremost, early retirement schemes. Some countries have already taken that step, but experience shows that it is not enough. In many cases, the actual retirement age remains two to three years below the statutory retirement age, because other provisions continue to encourage people to stop working.

In Austria, for example, one man out of two leaves the labour market with a disability pension. Sweden is currently experiencing a sharp increase in the number of older workers on long-term sick leave. Elsewhere, in places such as France and Belgium, the entitlement to unemployment benefit without any obligation to search actively for a new job means that older individuals can sometimes shift directly from unemployment into retirement.

While it is desirable for older workers to remain in the labour market, the OECD highlights that steps must be taken to ensure they have real employment prospects. Their jobs must be of sufficient quality to encourage them to stay on for an extended period. This requires a veritable change in attitude on the part of all concerned.

Governments are also encouraged to adapt their employment policies. Public employment services must meet the specific needs of older workers and measures that reduce benefit dependency, and they should facilitate the integration of older workers in the labour market.

They go on to say that companies must learn to view older workers as a genuine asset. They will need to eliminate discrimination against older workers, invest in their training, and adapt working hours and conditions to fit their needs.

Lastly, workers must also understand that early retirement is not a vested right and that they must get used to the idea of a longer career, perhaps taking on different jobs towards the end of their working lives.

Clearly, the issues of demography and older workers go well beyond the reform of pension systems. They are a matter of social equity, not only between workers and pensioners, but also between generations.

Without reform and a change in attitude, it will be our children and grandchildren who will pay the price.

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.

The new normal: Principles of life get a makeover

It was only 20 years ago that 44% of Australians retired before age 50. That’s right, nearly half of all Australians weren’t even 50 when they retired, and only a meagre 12% worked beyond age 60.

It was the done thing to leave school, get a job and stay in it for the next 30 years or so. True, people also generally lived shorter lives.

Today, huge improvements in health care and living standards means that people are living longer and are much healthier for most of their working lives. As a result, our generation spends more years working than any other in history.

With improved educational standards becoming the norm, let’s say an average Australian enters this phase of life at about age 20. The official retirement age today is 65 years. In another 10 years time, this age will be 67, and who know how much higher this age will be by the time most of today’s young Australians get there. This means there will be a good 45-plus years that an average Australian will spend in their working life before they can even start to consider receiving an age pension or accessing their superannuation.

That’s a lot of sinks to plumb, cars to sell, accounts to balance, children to teach and customers to serve, depending on your specialty.

In fact, it’s fair to say that younger Australians today are expected to work almost twice as long as previous generations. Couple this with job instability, low wages and meaningless work, and it’s no wonder an increasing number of people are disheartened by their work prospects and in some cases even suffering psychologically.

So what’s the solution? The government’s coiffures will be squeezed further by the increasing demands on the age pension – the baby boomers are about to head into retirement and are living longer – so don’t expect any good news from there. The price of tertiary education is also expected to increase, and let’s not even get started on price of houses these days.

Increasingly, you are going to need to depend on you. This means you’ll need to pay for your own education, earn a living and save for your own retirement. Hence, you’ll need to work longer. It can be overwhelming to realise that you could be stuck in that boring job until age 67 as you watch the ever-younger up-and-comers through your bifocals surpass you in status and possibly income. And it’s no wonder the movement to living frugally has taken off the way it has over the past few years as this new reality sinks in.

We live in an age where past career templates no longer apply. Nearly all of us know someone whose job has been made obsolete by technology or, increasingly, cheaper labour in an emerging economy.

While it may be tempting to just roll over and sleep some more, or tune into the latest TV reality show shot on the beach that is so unreal you wonder how it can even be called a reality show, you may be better off trying to understand the new normal so you have a better idea of what to do about it.

Here are three life principles more applicable to our time.

1. One career for life is old school

You may be lucky enough to know what you want to do from a young age and be happy doing that for life. For most of us though, boredom kicks in at some point and stays with us if we don’t take heed of its message. Any why wouldn’t you get bored spending over 40 years in the same career? Even the thought of it can be too much for some.

We are brought up to choose “one” career, not “a few” careers. I propose that we change our mindset to see that it is perfectly acceptable to change careers after a few good years – or even have a couple of different things on the go at the same time.

Interestingly, many of our youngsters these days have trouble choosing one thing only, so they don’t choose anything. See the problem? They can’t bear the thought of being pigeonholed so they opt out of choosing.

Variety is the spice of life, and who’d like to eat the same dinner every night for 40 years? The same should go for your career, so take the pressure off yourself and your kids to choose just one career.

Just start somewhere and know that it’s okay if it leads somewhere entirely different. It’s also okay to prefer more than one thing at a time. You can love the bar job because you get to mix with different people and at the same time you can restore old bikes because you love tinkering with engines. Hell, you may even find a way in future to show off the Harley in your new bar.

2. Study wisely

Parents and teachers have taught us that education is the cornerstone of a civilised and productive society. While this holds true to a point, maybe we need to update this assumption for today’s different circumstances.

For example, let’s look at what’s happening with lawyers in the United States today. For years, parents told their kids to study hard, get a good education and be a lawyer so they could earn a good income and get respect within society. So the kids did this. By the time they grew up, there was so much demand for further education in law that new law schools opened up. Now, there is a glut in young lawyers who can’t find paid work – and many more going through the system. They each owe about $US150,000 in tuition and end up working in department stories. Read it for yourself.

The biggest irony is that these young lawyers are considering suing their law schools because they are “fraudulently marketing the profession as a secure source of employment”. Truly!  Worse, in a few years entry-level law jobs may also go to low-paying graduates from emerging economies who look to America for a better life (after an expensive bridging course).

I’ll bet some of those students wished they could go back in time and become a trader’s apprentice instead – they’d be running their own show by now without the overhang of a huge debt they may never be able to pay off.

Studying hard shouldn’t be underrated, but it doesn’t always pay off. The costs of tertiary education are increasing in Australia and jobs in some industries are diminishing. We need to rethink the practicalities of what we choose to study.

3. Passion = interest + time + application

A mantra of our time is to “find your passion”. This may be true for a few, but for most this is a destructive chorus. No wonder there are more people on psychiatric drugs than ever before.

How many of us really leap into this life with a screaming passion to achieve something that will earn us millions and leave us bursting with more energy with each passing day? Sometimes we are just lucky to survive a day filled with irate customers, whining children and barely enough money to pay our bills.

Sure, discovering your unique interests is a worthy pursuit, and I’d even venture to say it’s essential to a healthy psychological existence, but just don’t expect “finding your passion” to be the magic cure-all. Too many of us remain stuck because we mistakenly believe we haven’t yet discovered some latent passion that once released will open the golden door to all the love, happiness and money in the world.

So find your interests, spend time on them, and apply yourself. At worst, your interests will cost you some money, but at best your spirits will lift and you may develop a latent talent that could earn you millions. This is the path to igniting your passions.

It’s never too late

It’s easy to make excuses such as “I’m too old to change” or “I can’t afford it”, or even “The time is not right”.

I’m not suggesting you completely throw in the towel to your existing life, but you need to know that you are never too old. There’s a reasonable possibility that you’ll still be here beyond age 80, so starting afresh at 40 is not so bad.

So why not put these new life principles to work now?