No plans to retire? Don't bank on it
The age at which we can claim the age pension has been slowly increasing. It’s currently 66, but it will be age 67 by mid-2023, and that’s seeing more of us working later in life. These days, less than one in two (49%) people aged 65 have retired, down from 60% in 2018.
It goes to show how our views on retirement are evolving. For some, working for longer is a financial necessity. But plenty of over-50s like the mental and social stimulation that keeping a hand in the workforce provides. The COTA report shows one in four over-50s have no plans to retire at all.
The problem is that life doesn’t always go according to plan. Ideas of working well into your 60s can easily be derailed by the unexpected. Unfortunately, ill health is the leading reason why people retire earlier than they had planned – or wanted to.
Figures from the McKell Institute[1] show that in 2017, over 300,000 50-64-year-olds were forced into early retirement due to ill health or disability. The financial impact can be devastating, with these premature retirees having around $115,000 less in super savings compared to if they’d remained in the workforce until age 65.
While this highlights the value of taking good care of our personal wellbeing as we age, it also reinforces the need to look after our financial health. In particular, I’m talking about embracing opportunities to grow super savings because you may need to rely on that money a lot earlier, and for a lot longer, than you anticipated.
On the plus side, since 1 July, employer super contributions have climbed from 9.5% of your base wage or salary to 10%. Even better, the annual limit on before-tax super contributions has risen from $25,000 to $27,500. That’s a good opportunity to review your salary sacrificed super contributions – or talk to your employer about kick-starting salary sacrifice to grow your nest egg. It’s a very tax-friendly way to add to your super.
With tax refunds starting to flow over the next few weeks, using your refund to make a before-tax super contribution can be a smart way to get plenty of bang for your buck.
You may be able to claim the contribution as a tax deduction in the current financial year, potentially pocketing a bigger refund this time next year. Personal super contributions also have a welcome impact on your retirement savings. A 50-year-old who gets into the habit of using a tax refund of, say, $2,000 to make a before-tax super contribution each year, can have an extra $35,000 in super by age 67.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
[1] https://mckellinstitute.org.au/wp-content/uploads/McKell_Early-Retirement_WEB.pdf
Frequently Asked Questions about this Article…
The age pension age is increasing to 67 by mid-2023, which means more people are working later in life. This change affects retirement plans as individuals may need to adjust their financial strategies to accommodate a longer working life.
Many people work longer into their 60s due to financial necessity, while others enjoy the mental and social stimulation that work provides. However, unexpected events like ill health can force early retirement.
Ill health is a leading cause of early retirement, which can significantly impact financial stability. Premature retirees often have around $115,000 less in super savings compared to those who work until age 65.
Improving financial health for retirement involves growing super savings. This can be achieved by taking advantage of increased employer super contributions and considering salary sacrifice options to boost your nest egg.
As of July 1, employer super contributions have increased from 9.5% to 10% of your base wage or salary, providing an opportunity to enhance your retirement savings.
Using a tax refund for before-tax super contributions can be a smart move, as it may allow you to claim a tax deduction, potentially increasing your refund next year and boosting your retirement savings.
Salary sacrifice is a tax-friendly way to grow your superannuation. By contributing a portion of your salary before tax, you can increase your retirement savings while potentially reducing your taxable income.
Regular super contributions, such as using a $2,000 tax refund annually, can significantly impact retirement savings. For example, a 50-year-old could have an extra $35,000 in super by age 67 through consistent contributions.