When should I start saving for retirement in Australia?

Yuyumoe

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Are you currently saving for your retirement? Or are you that someone who thinks, "I will have a pension when I retire anyway, so why do I still need to save?"

If that is what you think, see right below:

38%

of Australia's working population respondents believe their expected savings will be 'not at all close' to what they need when they retire.

26%

of people who were within 5 years of retirement thought they would not get close.

20%

thought they would only get slightly close.

From this, if you ask me, it makes perfect sense to try and save a little more than your super and pension for your retirement years. So if you decide to save, then continue reading this blog to find out what ways are out there to breathe some fresh air into your budget, read on!


What are the differences between a super fund and a pension fund?

Both Super funds and Pension funds are part of the superannuation system.  In simple terms, a super fund is the contributions your employers make during your working life to provide you with funds for retirement, while a pension fund is funded by taxpayers and paid to you by the government. That is why, you are only allowed to make contributions to a super fund. Pension funds cannot receive additional funds once they are set up by the government. This also means, usually when a person gets to retirement age, they will ‘roll over’ their super fund into a pension fund. For example, account-based pensions is one way you can exactly do that as it offers a tax-effective income. But there are also limitations tied to it like: 1) limit on the amount you can transfer, 2) set amount that must be paid, and 3) you might need to find out if your super fund requires you to sell your underlying investments. So, make sure that whichever transition method you choose aligns with your retirement needs!

Nevertheless, in some circumstances, where people are around retirement age, it can be appropriate for one person to have both a super fund and a pension fund at the same time. Both super and pension funds receive attractive taxation arrangements. For instance, for pension funds, all earnings within a non-commutable account-based pension are taxed at the same rate as an accumulation account – up to 15%. In contrast, all earnings received from investments within an account based pension are received tax free. Super funds, on the other hand, are usually 15% tax rate. Therefore, employers are required to pay a minimum 9.5% of your before-tax salary into a super account. This is usually a much lower tax rate than most individuals pay.

Thus, both funds ‘might’ not be enough to rely on to live comfortably throughout retirement but again this depends on how you want to live your retirement.

At what age should I retire in Australia? And, when will I be eligible for the age pension?

Depending on when you were born, you'll be able to access your super between 55 and 60. This means you’ll become eligible for the age pension at 65.5, rising to 67 by 2023. But there's no fixed retirement age in Australia, so it's totally up to you when you want to retire.

Although the average retirement age in Australia in the last five years is 62.9, still, retirement isn’t necessarily a one-time thing because more than 1/4th of the Australians between the ages of 45 and 59 return to employment each year.


What’s the best age to start saving for retirement in Australia?

According to the Australian Government Actuary (AGA), factoring in improvements in life expectancies over the last 25 years, half of today’s 65-year-olds will live to at least 88 for males and at least 90 for females. That means even if you only live to be the average age, and you retire at 65, you will need your retirement savings to last between 23 to 25 years. Therefore, there is no magic age, such as when to start planning for retirement, but the earlier you begin planning for retirement, the easier it will be to live your desired retirement life.

How much do I need to live a comfortable retirement lifestyle?

According to the breakdown from the ASFA Retirement Standard,  there are three tiers to living the life you want: a cozy retirement, a modest retirement, and one based solely on the Age Pension.

  • A cozy retirement: an individual would need an annual budget of $43,687 and a couple an annual budget of $61,909. This involves enough money to pay for house repairs, occasional holidays including overseas trips, a good car, regular leisure and lifestyle activities, and many other discretionary items that form daily living.
  • A modest retirement: an individual would need an annual budget of $27,902 and a couple an annual budget of $40,380. This involves a few cutbacks, such as less discretionary spending but still the ability to afford a car and enjoy most leisure activities.
  • An ok lifestyle: an individual would need an annual budget of $24,554 and a couple an annual budget of $37,014. This involves a frugal lifestyle on a tight budget, with most spending at a basic level limited to essential items only.

How to start saving so that I can enter retirement debt-free?

Here are five simple steps you can start taking now in order to possibly retire debt free:

  • Make sure you have an emergency fund.
  • Pay down as much of your debt as you possibly can before retiring.
  • The Snowball Method - make a Budget, write down exactly what you pay and to who and from there you can make adjustments starting from smallest to largest and tackle that one first..
  • Do not take on more debt before retirement.

You can also find many similar resources such as saving a deposit for your first home, how to make extra money from selling items, about super & F.I.R.E, etc all in our WeMoney blog page to help get rid of your debt forever.

What other considerations should I take to retire worry-free?

Make sure you have liquid assets - Have you considered downsizing your home? Selling other unnecessary assets or extra unused items? Liquidating some investments? Put the cash together and, most importantly, leave it there -- eventually, it will probably come in handy. To answer these questions, firstly, you have to plan to take control of your future.

Use tax-advantaged investment vehicles - take investment bonds - they are similar to a managed fund but are typically sold through insurance and mutual companies (like AMP, Australian Unity, GenLife, etc). This is an attractive option for those who want to retire early and maintain income without affecting your tax liability. For example, Investors do not have a tax liability while the funds remain invested inside the investment bond because any withdrawal amount will not be subject to further personal tax. In other words, earnings on the investment are tax-free. Limitation: Most financial institutions require your bond to be held 10years or more for the withdrawals to be non-assessable in regards to income tax purposes - i.e., check Australian Unity here.

Consider no-load mutual funds - when investing in the stock market or otherwise, consider no-load mutual funds that do not require an “investment advisor.” Such funds do not have sales charges and save you money.

Family planning - If you are married (if not, later?) or live with someone, communication, and teamwork concerning your household finances are crucial. To save, you both need to be on board with your desires, plans, and resources. For example, distinguish between needs and wants and look for places to cut like make automatic savings so that your money can be deposited straight out of your paycheck, or have a portion go into a savings account whenever you make a deposit! Start planning with your partner about what recreational activities you want to do after retirement. If you already have children (if not now, later?), teach them about savings and spending. For example, some essential lessons include waiting to purchase something you want, saving, identifying specific ways for them to save, using jars or envelopes, and making wise choices. Set rules such as if they spend money unnecessarily, will halve their pocket money for the next one or two months. Start now (I mean for people who are already married and have kids or maybe not yet, but for those who are not, it's handy for the future, hehe)!

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Thanks for reading this blog, and if it serves the purpose of what you are looking for or makes you wonder that an age pension alone is not enough, then share it with someone to fast track their planning for retirement too. ;)


Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

Things you should know

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