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How to make the transition to retirement

How to make the transition to retirement

Australians are now living – and working – longer than ever. The most recent statistics show that the average age of retirement for those aged 45 and over is 55.3. Of those who had retired in just the last five years, however, that average age jumped to 62.9.1

There’s also been a change in the way we’re retiring. For those still in full-time employment but intending to retire, 37% plan to transition to part-time work before retirement, with 67% planning to stay with their current employer.2

If you’re ready to ease into your golden years, it’s important to understand how you can transition into retirement while supplementing your income to ensure you have the funds to live comfortably.

Did you know: In Australia, a male born in 2014–16 can expect to live to the age of 80.4, while a female can expect to live to 84.6. In 1960-1962, the average lifespans were 67.9 and 74.2, respectively.2

When should you start thinking about the transition to retirement?

It’s never too early to start planning your retirement. But first, you’ll need to do the sums. Map out the expenses you currently have – and will have into the future – as well as the assets and income streams you have available and that may kick in when you stop working.

To ensure a comfortable retirement, where you can enjoy leisure activities and have a good standard of living, the Association of Superannuation Funds of Australia recommends the following budget (for those aged around 65 who own their home and are relatively healthy3):

  Modest lifestyle Comfortable lifestyle
  Single Couple Single Couple
Total per year $27,425 $39,442 $42,953 $60,604

When crunching the numbers, keep in mind the age you must be when you are eligible for the pension or to access your super.

Another consideration is whether you are not just financially but also mentally and emotionally ready for the change that retirement brings. Create a checklist of pros and cons, these questions may help kick-start the process:

  • What provides you with the most fulfilment and satisfaction in your life?
  • What do you want out of retirement?
  • What are your goals for the next 3–5 years and how can you achieve them?

Is the transition to retirement pension an option?

A transition to retirement (TTR) pension allows you to access your super while you’re still working. This can enable you to either supplement your salary (while maintaining your lifestyle) as you reduce work hours, or salary sacrifice into super to save on tax.

There are a few requirements you’ll need to satisfy to access a TTR pension. First, you must have reached your preservation age, which is between 55 and 60, to start a TTR pension.5 TTR pensions are only available with accumulation super funds – so you’ll need to check yours is one of those. You’ll also need to leave at least a small balance in your accumulation account so that it remains open to receive ongoing employer super contributions, along with any voluntary contributions you make.

Will a TTR pension benefit you?4

  Pros Cons
Using a TTR pension to reduce work hours
  • Ease into retirement.
  • Supplement employment income.
  • Continue to receive employer contributions.
  • Pay less tax on income.
  • Less money in retirement.
Using a TTR income stream to maintain work hours and save tax
  • Grow your super: your super balance will get a boost through increased concessional contributions.
  • Pay less tax on contributions.
  • Pay less tax on income.
  • Benefits may not be worth the trouble (this option may only be desirable if you’re aged 60 or older and are a mid to upper-middle income earner).

Choosing the best option here depends on your overall retirement strategy, as well as your income needs now and into the future. Other things to investigate as you make a decision include your benefits and entitlements and how any changes may affect the life insurance you have with your super fund.

Ready to reduce work hours?

If working part-time is an attractive option, a non-commutable income stream is the only type of pension available if you wish to commence a transition to retirement, according to SuperGuide.

This option means you must draw an income of between 4% and 10% of the account balance, as calculated on 1 July of each year, or at the commencement date of the pension (pro-rated).5 Whether this is the right option for you depends on your age, tax implications and your retirement strategy.

You’ll also need to consider whether you’re ready to step back to part-time work as it can often involve a change of responsibility and status with your colleagues. Are you ready for that right now?

Retirement is an exciting and potentially confusing time. Sometimes the easiest solution is instead making a transition into retirement. Talk to your accountant or financial advisor to get advice about what will work best for you.

This is general information only and does not consider your circumstance.


References

  1. Retirement and Retirement Intentions, Australia, July 2016 to June 2017Australian Bureau of Statistics
  2. Deaths in AustraliaAustralian Institute of Health and Welfare
  3. ASFA Retirement StandardASFA
  4. Transition to retirementASIC’s Money Smart
  5. TRIPs: 10 important facts about transition-to-retirement pensionsSuper Guide