Can Alice retire while still working?

There was great feedback on our article about peak retirement a few weeks ago. It seems that many Retirement Essentials members are planning on working longer, but not necessarily harder! As a consequence, our advisers have had many consultations helping both singles and couples to organise their finances to maximise their ongoing retirement income. Today we look at the way the transition to retirement is changing for many Australians and how they can use the rules of both the Age Pension and super to ensure they get their best financial outcome

As mentioned, ‘peak’ retirement age is now just over 66 for men and nearly 65 for women. This is much later than previous decades and there are a few factors involved. Most recently the Covid pandemic forced workers across the globe to stay home. Those that could, continued to work and thus the new trend to Work From Home (WFH) has become a reality for workers of all ages. In a sense this has meant an easing of many aspects of work, including commuting, the need to dress formally, costs associated with attending an office or workplace). For many people working from home is simply easier. For this reason, many older workers are finding it attractive to continue. 

However, believing that choosing a retirement or transition to retirement date is available to all is incorrect. So called ‘knowledge workers’ find it easier than most to work from anywhere – be it home, a holiday house, a caravan park or a friend’s dining room table. Those who do manual work do not have the same luxury – jobs such as cleaners, hairdressers and builders labourers usually have to turn up! And health, of course, remains the wild card, with around 40% of retirees leaving the workplace due to ill health, caring duties or redundancies. Life is not fair, and this is ongoing evidence of that fact.

But if you are one of the fortunate 60% who do get to time their work exit, how do you use the rules in your favour? As a firm believer in the show, don’t tell principle, here’s a very brief overview of the rules of a Transition-to-retirement, and more importantly, how Nicole was able to support Alice to map a way of achieving her main life goals.

Using a Transition-to Retirement strategy:
The basic rules

Alice knows what she wants
But will she have the income?

Alice is 62. She’s been widowed for ten years and a firm believer in the YOLO principle – You Only Live Once! She passionately wants to follow her dreams rather than just trudge into a late retirement. Her number one goal is to explore her own creativity, sampling art and design classes and volunteering at a local art gallery with like-minded people. In essence she would like to go from a 5- day working week to 3.5. If she can do this, she intends to continue working until age 70. She owns a modest two-bedroom home, with no mortgage.

As a registered nurse, Alice is currently earning $75,000 per annum and believes she can earn $52,500 gross after cutting back hours. Her current outgoings of $60,000 per annum while on a full-time salary mean that she can’t afford to cut back without another supplementary source of income. Her super balance is $340,000 and she has $10,000 in a savings account.

After learning about Alice’s current situation and her future plans to reduce her working hours, Nicole worked with Alice using the Retirement Essentials Retirement Forecaster. Here’s how they mapped out Alice’s next 30+ years:

Immediately – Age 62

Live the dream! Alice reduces hours and starts a Transition to Retirement (TTR) drawing about $19,000 per annum from super to which meets her  spending needs when combined with her reduced salary. 

At age 65 most super funds will automatically transition her ‘TTR’ to a retirement income stream  (typically an Account-Based Pension or ABP) without any action on Alice’s behalf. (both pension accounts operate the same, but the super fund will remove the restrictions on withdrawals and tax-free earning rates will be applied once the account becomes an ABP).  You can find out more about a TTR and an ABP and whether they could be suitable for you in an Understanding Super consultation.

At age 67 she will qualify for around $9,000 per annum of Age Pension which allows her to reduce her super drawdown to $10,000 per annum

At age 70, when her employment income ceases Alice will become eligible for an estimated Age Pension entitlement of $25,000 per annum

For the first five years of retirement she estimates that she will need around $50,000 per annum.

From age 75 this will reduce over time down to spending $45,000 per annum from age 80 onwards. There is a 58% probability that this spending is sustainable to age 90 or beyond. 

What if she spends less?

Another option is that Alice might spend around $55,000 per annum from now until age 75, reducing to $45,000 from age 80 onwards, with the probability that  these levels of spending are sustainable increasing to 61%.. 

Summary

The TTR strategy will allow Alice to achieve her desire for more ‘me’ time as soon as she wants. This TTR pension can be relatively easily moved to a retirement income stream (e.g. Account-Based Pension) at age 65.  From 67 onwards she will most likely qualify for a modest pension and so can reduce her super withdrawals accordingly. When Nicole demonstrated how these numbers can work in the Retirement Forecaster, Alice was delighted. It’s the best of both worlds, she declared.