How a Higher Retirement Age Can Work For You

We’re living longer. Australia was home to 3,700 centenarians in 2021. In 2050, that number is expected to be 50,000. 

The age at which a person can access the Age Pension is 67 for everyone from 1 July this year. But a future with fewer workers and a population living longer means that the current Age Pension access age of 67 might not be sustainable.

Research from Professor Hanlin Shang at Macquarie University suggests that the age at which a person accesses the age pension might need to rise to 70 years of age by 2050. His research focusses on a 23 per cent ratio — the ratio of people of age-pension age and the number of workers.

Raising the retirement age anew would impact the retirement plans for workers currently in their 40s.

My focus in this article is to consider what impact later access to the age pension might have on retirement planning, with a suggestion that both in the future, and now, people might think about using more superannuation funds prior to reaching age-pension age, as a plan to retire earlier.

The suggestion is a simple one and possible because of the difference in the age at which we can access the age pension, and the age when we can access superannuation (60 for most people).

Finding the Sweet Spot

There is a point that I think represents the most bang for your buck in terms of retirement savings – the point where you are receiving the full age pension while having assets right up to the level where you would start to lose some age pension income because of the asset test.

A single homeowner can have up to $280,000 and receive a full pension. Assuming they have $20,000 of lifestyle assets (e.g. a car, furniture), that means they can have $260,000 in superannuation (or other investment assets) and still receive the full age pension, which is $1,064 per fortnight or $27,664 per year. Assuming a drawing rate on their assets of 4.5 per cent per annum, they can add $11,700 per year to the $27,644 which is $39,344 per year.

A homeowning couple can have up to $419,000 in assets and receive a full pension. Assuming they have $30,000 of lifestyle assets (a few more lifestyle assets than the single person), they can still have $389,000 in superannuation (or other investment assets) and still receive the full age pension which is $1,604 per fortnight or $41,704 per year. Adding a 4.5 per cent annual drawing rate on their assets adds a further $17,505 per year – making a total of $59,209.

In both cases the age pension figures for both the single and couple include the pension and energy supplements. It is assumed that the age pension increases in line with inflation, and that the superannuation earnings are after inflation – so the figures will be able to increase each year with inflation.

The point of identifying this sweet spot is this - if this seems like an acceptable retirement income, perhaps, as the age-pension access age increases, superannuation assets could be used to fund retirement prior to when the age pension can be accessed. Then, at the age of age pension eligibility, a mix of the remaining superannuation assets and the age pension can be used to fund retirement.

After all, the age at which you can access superannuation is 60, well before the age at which you can access the age pension. 

Is 67 Really Retirement Age?

When changes to the age at when the age pension can be accessed are discussed, the age pension access age is often described as the ‘retirement age’.

In reality, people can retire whenever they want to and are able to afford it – people don’t have to be beholden to the age pension eligibility age for their retirement date.

This is where the previous calculations around the ‘sweet spot’ of the age pension asset test might provide some information about how much earlier than their age pension eligibility date they might retire – not just if the age pension access dates increases to age 70 in the future, but for those people planning retirement right now.

Using Super Assets Before 67

Using the figures previously mentioned, let’s assume that the single homeowner is happy with around $39,350 per year in retirement (generated from $260,000 of superannuation assets) and the homeowning couple is happy with around $59,209 in retirement (generated from $389,000 of superannuation assets) – in both cases increasing each year with inflation.

They can then target any excess superannuation assets to use to fund an earlier retirement.

For example, if the single homeowner has a superannuation accumulation of $400,000, this is $140,000 above the $260,000 they need to have at the time they reach age pension eligibility age. Given that they are satisfied with a $39,350 per year retirement income (increasing with inflation), the $140,000 above the $260,000 can be used to fund around 3.5 years of additional retirement (140,000/$39,500 = roughly 3.5).

The maths of this is not challenging, and those who want to target a higher retirement income can look at the level of assets they need at age pension age, and then use excess assets, most likely as a superannuation pension, to fund an earlier retirement.

Conclusion

As the discussion around the age at which we will be able to access the age pension in the future plays out because of the decreasing number of workers and the increasing number of people enjoying a long retirement, it is worth keeping in mind that the age pension eligibility age does not dictate when you have to retire.

Having an understanding of the mix of superannuation and investment assets and age pension needed to fund your preferred retirement lifestyle can then let you use surplus assets to fund your retirement prior to being eligible for the age pension.