Many of us would like to think that getting ‘older’ means getting ‘wiser’. But when it comes to money that isn’t always the case. Australia’s superannuation and Age Pension systems can be complex. There are a number of common mistakes that retiring and retired Australians make.
What are those mistakes and how might you avoid them?
1. Underestimating how much you need
The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard calculates that a “comfortable” retirement for a couple costs $69,691 per year. For singles the figure is $49,462 per year. To fund these levels of income, the ASFA calculates that a couple will need a nest egg of $690,000, and a single $595,000 at retirement[1]. Less than that and retirees become increasingly reliant on the Age Pension.
In June 2019, the average total superannuation balance for someone aged 60-64 was $359,870 for men and $289,179 for women – a “comfortable” retirement might be possible for a couple based on these figures, but for a single it is not ideal.
2. Retiring too early
Australians retiring today can expect to live until their mid-80s. For retirees in their mid-50s, that means finding a way to pay for a further 30 years of life.
The obvious solution to retiring too soon is to work longer. This provides a double benefit: it extends the savings period allowing a greater sum to be saved, and delays the point where withdrawals start to eat into accumulated funds.
Many people may also overlook the social benefits of work. They end up bored, and then could face the challenges of trying to re-enter the workforce as an older worker, or taking an extra risk by starting a business.
3. Not topping up super
Making additional contributions into the tax-favoured superannuation environment can really boost super savings. Strategies involving salary sacrifice, spouse contributions and government co-contributions should all be in play well before retirement. Within the allowable limits of course.
4. Investing too conservatively
A common view is that retirees should dial back on their investment risk by allocating more of their savings to cash and fixed interest, and less to shares and property. However, even 10 years is a long-term investment horizon, let alone 20 or 30. Cutting too far back on growth assets early in retirement may see savings dwindle too quickly.
5. Withdrawing super as a lump sum
Superannuation can be withdrawn as a lump sum after retirement, and if you are over 60 it’s all tax-free. But what then? Common choices are to take that big trip or renovate the home. Of course you’ll want to celebrate your retirement, but if you’re thinking of dipping into your savings in a big way, make sure you understand the potential implications for your future lifestyle.
Another option is to invest outside of super. This may be entirely appropriate. However, don’t forget that if you are over 60 and your super is in the pension phase, earnings and capital growth will be tax-free. Investing outside of super may see you paying more tax than you need to.
6. Expecting too much age pension
Just because you’ve decided to retire doesn’t mean you automatically receive the Age Pension. Firstly, if you haven’t yet reached your pension age, which is 65 to 67 depending on your date of birth, you’ll need to fund your lifestyle until you do.
Second, there are income and assets tests. Too many assets (not including the family home) or too much income means that the amount of pension you can receive will start to fall, eventually to nothing. It’s important to remember that these tests apply to the combined assets and income of a couple. If your partner is still working you may receive little or no pension.
7. Forgetting to plan your estate
If you don’t have a current Will, haven’t granted someone you trust an enduring power of attorney, or made a binding death benefit nomination for your superannuation, you’re likely to leave a big headache for whoever will manage your affairs if you become incapacitated or die. The solution? Talk to a lawyer who specialises in estate planning matters sooner rather than later.
8. Overlooking preservation age and conditions of release
You can retire any time you like. You may even be able to access some of your super if you have an unrestricted, non-preserved component. Otherwise you need to meet a condition of release. This usually requires reaching preservation age, which is between 55 and 60, depending on your date of birth. If you’re under 60 it also means ceasing gainful employment with no intention to being gainfully employed again. Between 60 and 65 it is sufficient just to cease an employment arrangement. All funds can be accessed from age 65, regardless of employment status.
One way to access super after reaching preservation age but without retiring is to start a Transition to Retirement pension. However, this must be paid as an income stream. Lump sum withdrawals are not allowed.
9. Carrying debt into retirement
It can be hard enough keeping up mortgage and other debt payments when you’re working. It can become a real burden in retirement.
Where possible, do your best to pay down debt. It may help to consolidate debts and pay off one loan at the lowest possible interest rate. Downsizing your home may also allow you to start retirement debt-free.
10. Paying for unnecessary insurance
If you are debt-free and don’t have any financial dependants, you may not need to maintain the same level of life and disability insurance you once required. Insurance premiums can also become expensive as you get older. The run up to retirement is an ideal time to review your insurances.
