Is delaying retirement a good idea?
It’s that time in your life when you should be able to kick back and enjoy the fruits of your labour, so how does the prospect of delaying retirement sit with you?
The idea may not be a popular one but with the rise in the cost of living and the government looking to slash financial support for older Australians, it’s a decision many need to consider.
US sites have been awash with stories of seniors remaining in the workforce beyond retirement age, with data suggesting more than one in five people in the US by 2040 will be over the age of 65. The same is true here in Australia.
Following the Federal Government’s announcement to raise the pension age to 70 by 2035, it also seems like a trend that will continue, and for those born after 1965, a reality of life.
But, is it all bad?
While in most cases the decision to remain in the workforce is a financial one, many older workers enjoy the social engagement and the health benefits associated with keeping a job.
Last year, a report found that workers in their early 60s who had a chronic health condition had better retirement savings and wealth than those who had quit work.
The findings, released in National Seniors Australia Productive Ageing Centre’s report, A widening gap: The financial benefits of delaying retirement, also found that remaining in the workforce past the age of 65 had the potential to offset the high costs of poor health, which include treatment costs, changes to living arrangements and buying aids or equipment.
The same study found that working up to and past the retirement age was associated with a significant increase in the value of household assets. For example, between 2006 and 2010, the financial assets of those who remained employed in 2006 and in 2010 increased by $59,400 while those who were employed in 2006 but not in 2010 saw less of an increase with $34,300.
The upside of phased retirement
Darren James, financial planner at AMP, says many Australians are giving greater consideration to the option of a phased retirement – reducing their hours over time and gradually “weaning” themselves into retirement – rather than going cold turkey. An approach which can lead to significant advantages from a superannuation standpoint.
“The biggest advantage of waiting to retire until 60 or over is that income and any withdrawals from super are 100 per cent tax free, whereas up until this age tax may apply,” he reveals.
“Also for every year that you delay retirement is another year that you avoid dipping into your retirement savings which will obviously help your retirement income last longer. You will also be another year closer to being eligible to receive the age pension which could reduce the amount of money you need to draw from your own retirement savings (provided you meet an income and assets test).”
Why it pays to keep working
For those nearing retirement but still working, look into topping up your super balance without reducing your after-tax income with a transition to retirement strategy. Mr James says you can make extra contributions to boost your super by salary sacrificing but then draw on the super to replace this income.
“This super income is highly tax effective – it is currently tax free for people over 60 and tax advantaged for those aged 55 to 59,” he explains. “As the tax benefits of super really kick in after retirement, the less you can draw down on your super balance before retiring, the more money you will keep in your pocket for the future.”
The reality is that Australia has one of the highest life expectancies in the world, which is good news, but along with that has gone the retirement age. For those who enjoy their job and are in no hurry to retire, or who wish to retire with a few extra bucks in the bank, delaying retirement can be a great boost for setting yourself up to be in a much better financial position for when you decide the time is right.
Always seek professional advice to better understand your financial position and to find out when retirement may be possible for you.
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