ADVICE

Why more older Aussie workers are deferring retirement

Retirement age in Australia has risen to 65.2 for men and 64.3 for women. Picture: Shutterstock.
Retirement age in Australia has risen to 65.2 for men and 64.3 for women. Picture: Shutterstock.

According to a recent report by Terry Rawnsley of KPMG, many older workers are deferring retirement.

As a result, over the last 20 years, the expected retirement age in Australia has risen to 65.2 for men and 64.3 for women. KPMG's report attributes this to a range of factors, including strong labour market conditions, which help to retain older workers in jobs, changing social attitudes towards older workers, and an increasing trend towards part-time work among older workers.

COVID-19 has played a part too. With overseas travel virtually impossible for the past 18 months, many older workers think they are better served by working longer rather than sitting at home with nowhere to go.

Some need to top up cash reserves, because their income has been reduced by COVID-19. Others - a large percentage of the office workforce - are now happily working from home; while it has its challenges, many people find it beats both the office environment and the grind of commuting every day to and from an office.

But there's more to it than any of these reasons. Pensionable age - the age you can access the pension - is increasing to 67 for people born after January 1, 1957, so anybody who wants to retire before their pensionable age needs to ensure they have enough capital to live on until they are eligible for a pension. But there's an even bigger factor. Because of the way the mathematics works, the largest increase in any long-term compounding investment, including your superannuation fund, comes at the end of the period.

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Remember, every time your portfolio doubles in size, there is more growth in the final double than the sum of all the other doubles combined. The numbers are mind-blowing.

Think about a person aged 60, earning $100,000 a year, with $500,000 in super. If their fund earns 8 per cent per annum, the balance would be $800,000 in another five years. That's an increase of 60 per cent in your superannuation just by working another five years.

The financial side is important, and obviously the longer you can defer your retirement the more your superannuation should grow, and the longer it will last.

It is highly recommended to do some sort of work after you retire. Ideally, it could be some kind of part-time work that will add meaning to your life, as well as boosting your superannuation, or it could be voluntary work, or even working on a hobby. It's not all about the money.

But pension rules are geared to encourage us to work a little: the first $150 a week you earn from a business or personal employment is exempt from Centrelink's income test. So, if a couple of pensionable age, who have assessable assets of $405,000 made up of $380,000 in super, and the balance in car and personal effects, draw down the standard minimum of 5 per cent a year from their superannuation, they receive an income of $19,000 a year.

If they also each earn $7,800 a year from paid work, they would be eligible to receive the full pension of $37,923 a year. That means a total tax-free income of $72,523 a year.

One of the biggest decisions you will make in your life is when you retire. Research tells us that those who prepare and plan for retirement tend to have a much happier, healthier retirement than those who suddenly find themselves out of work with no plans.

Noel answers your money question

Question

My husband and I had a SMSF but closed it in 2013 as we intended going overseas for two years at the time and were told we could not keep the SMSF if we did so.

Interest rates were reasonable at the time, so we placed $285,000 each into a Defence Bank Retirement Savings Account (RSA). The fund has not had good returns recently, well below deeming - but there are no fees and the funds are secure which was important at the time. We are self-managed retirees and do not qualify for the age pension. We have a CSHC.

Can we shift the RSA funds into a better superannuation fund, where our returns are at least equivalent to current deeming rates. I made a loss on my last attempt to independently access the stock market by purchasing some dud shares.

Answer

A Retirement Savings Account is virtually equivalent to having money in a bank account within the superannuation structure. There are certainly much better returns available through a conventional superannuation fund which has the ability to invest in a wide range of growth assets.

You have a range of options available, and you can certainly transfer the money to another superannuation fund but I suggest you obtain advice from a good advisor.

They will look at what income you need, your other assets and liabilities, the tax impact of the various options and make a recommendation. In the end it will be your choice but if you can afford it this is the time to obtain advice.

The first thing to do is to ensure you have the full details on the options which your fund should supply. Many funds run pre-retirement seminars so check if that service is available. I wish you a long and happy retirement.

Question

I am 35 and earn $190,000 per annum. My wife runs her own business and currently pays herself $50,000 per annum. We are planning our first child in the next year.

We own an apartment valued at $900,000 and the mortgage is $400,000 We also have another loan/line of credit of $150,000 for the business. The business takes care of paying this loan. We currently have approval for about $550,000 for an investment property, and we would be comfortable buying a rental unit in the area we live in and are familiar with.

All of these loans are based solely on my salary to protect our assets against the business, so we treat my wife's income as a bonus to pay more mortgage and living expenses etc. In your expert opinion are we better off trying to put more money into our current home loan or should we look at a second property investment?

Answer

The first rule is not to become overcommitted because you do not want to put yourself in a position where you are forced to sell assets cheaply if the market is having a flat period.

The second rule is to maximise your deductible debt and minimise your non-deductible debt so if you can afford it, you should be paying as much off your residence as you can afford and then using any surplus income to borrow for investment.

Just keep in mind that the key to success in real estate is to buy well and then add value. In my experience it's very hard to add value to a unit so take the time to research the market before you jump in.

Question

I plan to retire next year, and my superannuation offers the choice of an indexed pension, a lump sum payment, or a non-indexed pension for life calculated at 9.25 per cent of the lump sum.

I prefer balanced investments and if I took the lump sum would invest it in shares through a managed fund. I have no reason to believe I won't live for another 25 years or more. What are your thoughts on these options?

Answer

This is always a difficult choice - major considerations are your confidence in handling money, how long you think you will live, and whether leaving money to other family members is important to you. Based on the information provided, you seem well placed to take the lump sum and manage the money yourself.

Question

I am thinking about buying some government bonds but so far I can't find anybody to sell them to me. There are plenty of offers for corporate bonds but I feel that government bonds would be a better security. Your comments would be welcome.

Answer

You can acquire government bonds direct from the government via their website - https://www.australiangovernmentbonds.gov.au/ but the big question for you is whether government bonds are an appropriate investment in this climate of potentially rising interest rates.

The current 10 year Australian bond rate is 1.265 per cent which means if you invested $100,000 in such a bond, you would receive interest of 1.265 per cent for the next 10 years with a government guarantee of $100,000 being paid back to you on maturity.

You may suffer a big loss of purchasing power if we have inflation. Your money is not tied up for 10 years and you can buy and sell bonds on the bond market any time.

Just keep in mind that if interest rates rise, your bond, which has a fixed rate, will become less valuable as there will be higher yielding bonds available.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
This story Why more older Aussie workers are deferring retirement first appeared on The Canberra Times.