Choose your own retirement

13 October 2017

Author: Centuria Investment Bonds
Date: 13 October 2017

Successive governments have pushed out the age at which Australians can access superannuation and aged pension benefits, which for many, delays the age at which they can retire. In this article, Centuria Capital examines the need for retirement savings and looks at investment strategies outside of superannuation that could fund an early retirement.

Up there with the great Australian dream of home ownership is the dream of early retirement – why wait until you’re too old to enjoy it, right? Whether it’s world travel, undertaking voluntary work, or buying a caravan and seeing Australia grey nomad style, most of us have a plan, a dream, for those post-work years. Why then does early retirement seem to be out of reach for the majority?

 

Retirement age and intention

The 2014–15 Multipurpose Household Survey (MPHS) undertaken by the Australian Bureau of Statistics (ABS) found that the average age at retirement for people aged 45 years and over in 2014–15 was 54.4 years (58.2 years for men and 51.5 years for women); as illustrated in figure one, women generally retire at an earlier age than men.

Figure one: Retirement ages by gender

Age Men Women
Less than 55 years 24% 52%
55-64 years 50% 38%
65 years and over 26% 10%

Source: ABS

The average retirement age those who have retired in the last five years was 61.5 years; 62.6 years for men and 60.4 years for women.

Of the 3.8 million people over 45 years that are currently employed, 1.3 million (35%) could not say at what age they would likely retire. Figure 2 indicates the responses from the remaining 65% of this cohort.

Figure two: Retirement intention

Age Men Women
70 years and older 26% 18%
65-69 years 51% 46%
60-64 years 18% 26%
49-59 years 6% 10%

Source: ABS

The survey included retirement funding; 53% of those aged 45 years and over expect their main source of retirement income to be superannuation, annuity or allocated pension, and 27% cited government pension or allowance to be the main source of expected income. Early retirement is not the in the sights of many.

 

Access to superannuation and aged pension

Two factors trigger access to superannuation savings – reaching the preservation age and retirement. Tax may be payable on any super benefits withdrawn before the age of 60 (subject to certain exceptions).

Figure three: Preservation age

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
On or after 1 July 1964 60

Source: ATO

Since 1 July 2017, the age at which retirees can apply for the Age Pension has increased to 65.5 years and, as illustrated in figure four, will increase to 67 years of age in coming years. When he was treasurer, Joe Hockey caused a lot of angst with a proposed increase in this age to 70 years; while this did not pass, there remains the spectre of further increases in age before eligibility in the future.

Figure four: Aged Pension age

Date of birth Age Pension age
1 July 1952 – 31 December 1953 65 years & six months
11 January 1954 – 30 June 1955 66 years
1 July 1955 – 31 December 1956 66 years & six months
From 1 January 1957 67 years

Source: Department of Human Services

As well as speculation around a changing age at which the Aged Pension may come into play, there has been chatter about increasing the preservation age for access to retirement savings. For clients making medium to long-term retirement plans, the potential for such changes needs to be considered. Many of those solely reliant on superannuation savings will have little choice about the timing of their retirement.

 

Getting older, living longer

Australia’s population is ageing and, at the same time, life expectancy is increasing thanks to better healthcare and a higher standard of living.

Figure five: Life expectancy…how many more years?

Current age Females (years) Males (years)
40 45.4  41.7
45 40.6  37.1
50 35.9  32.5
55 31.2  28.0
60 26.7  23.7
65 22.3  19.5

Source: ABS

Retirement savings will have to last longer in the future. A person who retires at age 55 will have, on average, a further thirty years of life to fund. With the limits on superannuation savings that came into effect on 1 July this year, can superannuation be relied on as the only form of retirement savings?

Although the ABS retirement intentions data suggests only a small number of Australians wish to retire early (i.e. between ages 49 and 59), this is likely tied in with the planned reliance on superannuation to fund retirement. With super off the table until at least age 60 – with the prospect of further changes pushing out preservation age – what investment strategies can be engaged to fund an early retirement?

 

Investment strategies to fund an early retirement

Many Australians invest outside the superannuation system. Whether it’s an investment property, a share portfolio, ETFs or a term deposit, investors adopt a range of strategies to meet short, medium or long-term financial goals. Let’s consider the pros and cons of several common investment strategies that could be used to fund an early retirement.

Residential investment property

Low interest rates coupled with increased demand for housing stock has created a boon for property investors. The opportunity to use negative gearing can provide some tax benefits to property investors.

Pros Cons
Income from rental Costs – purchase costs, property management, repair and maintenance
Capital growth potential Risk of property damage by tenants
Potential for tax benefits through negative gearing No access to capital; asset must be sold in its entirety
Current low cost of capital to fund purchase or renovation Liable for income tax on rent and capital gains tax on sale of property
Current demand for rental property keeping rent high Excess supply may reduce demand and rental income, especially in apartment sector
Risk of property market correction
Can only add to investment via enhancements, may risk over-capitalising


Australian share portfolio

Australia’s unique dividend imputation system allows many listed companies to pay dividends that are partly or fully franked – in other words, are partly or fully tax paid, at the prevailing corporate tax rate. If an investor holds a portfolio of stocks that each pays a fully franked dividend, the investor would pay:

  • No income tax if their marginal tax rate is equal to or less than the corporate tax rate, or
  • The difference between their marginal tax rate and the corporate tax rate.

However, not all companies pay fully franked dividends, and some dividends have no tax paid at all.

Pros Cons
Income from dividends Income tax payable on dividends not covered by imputation credits
Franked dividends can make some shares tax effective Capital gains tax payable on increase in share price – not always triggered by sale *
Capital growth potential Capital gains tax may be payable on sale of shares, even if reinvesting the proceeds into other shares or assets *
Ease of transacting, can easily buy and sell parcels of shares Market correction may trigger a significant loss that can take some time to recoup
Transparency on exchange, access to information

* Capital gains tax discounts should be considered and may compare favourably to other investments in some circumstances.

 

Term deposits

RBA data reveals the average term deposit rate on a one year, $10,000 investment was 2.25% at 31 July 2017; for three years, it’s 2.5%. Given the current inflation rate of 1.9%, once tax is paid on the income received, it would be unlikely to keep pace with inflation. In real terms, each dollar of income received would be worth less than when it was invested. Despite this, APRA’s Monthly Banking Statistics for June 2017 shows that Australians have more than $844 billion on deposit.

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