Three Phases Of Retirement





Hi Folks,

There are three distinct phases of retirement.

1. Self-Funded
2. Access to Superannuation
3. Aged Pension

Essentially, many folk have to wait till they are eligible to receive an aged pension (in my case 67 years old) to be able to retire. This is the worst case scenario for someone with zero investments and zero or little super.  It used to be the norm, but with pension ages increasing and the worth of the pension amount so low, it is a bad choice if you can avoid it.

I'll use my own case scenario to explain the three phases.

1. Self-Funded -  I wish to retire from paid work at about 55 years old. I'll be 5 years too young to access superannuation and 12 years too young to get the aged pension.  This means I absolutely need to have investments outside of superannuation that I can draw on to provide me with an income to tide me across.

In my opinion, the wisest investments to have for this stage of retirement are investments that attract little CGT (Captial Gains Tax - simply, the tax you pay on the increased value of your investment when you cash it in) and that pay regular earnings and also are easy to liquidate. Dividend bearing shares with 100% franking credits fit this bill perfectly.

I need enough of these investments to cover my intended expenses for 5 years till I can access my superannuation in phase 2.

2. Access to Superannuation - 5 years on from phase 1, I will be 60 years old and can now access my superannuation. I would transfer my superannuation accumulation account across to a pension account and reap the benefits of zero tax on earnings and zero CGT too (if indeed this is still available in 5 years time). Back when I was working, I would have actively bought a combination of growth and dividend bearing shares inside superannuation which I can now access tax free. Also, during the 5 years that I was living off my self-funded investments in phase 1,  my superannuation would have been quietly reinvesting its earnings and increasing in value even though I was not adding to it.

I would need enough in my superannuation to see me through for another 7 years till I was eligible for the aged pension in phase three.

3. Aged Pension - By this time I will be 67 and would receive the aged pension in full if my remaining investments in superannuation and self funded investments were below legislated thresholds. I would also be eligible to earn a prescribed amount tax free from all my sources of investment outside of super too.



Camp drafting at the royal Easter showing this year.
I love watching these horse men and women camp drafting.


For some of us, retiring early is a necessity due to ill health and/or being too physically/mentally worn out to remain in paid work. For others it will be a luxury decision. For me, at 55, it will be a bit of both to be honest.

Using the above phases and concepts, you should be able to reverse engineer your own retirement date and identify the three phases and how they will work.  Yes, I know this is based on an Australian scenario, but the similarities certainly still exist across most developed countries.

Have some fun with these figures and concepts, you might just surprise yourself with what is possible!

I have not even mentioned the option of working part time or casually/seasonally during the first two phases which would potentially augment your income in both of these stages.

It's possible folks - do your homework.


Take care and stay nice.

Mr HM.

Comments

  1. Your last sentence .." do your homework." sums it up. Waiting till you are 50 to make the decision for early retirement at 55 is too late. Although it may be possible to save enough, it is highly unlikely to be achieved. Education about money, retirement, lifestyle should be included as part of the school curriculum. Due to compounding, starting early is the first step. I enjoy you comments. erin

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    1. I am continually reinforcing this with my 5 daughters. We changed our financial literacy at 45 and it has been possible but dang hard work.

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  2. I'm one of the older generations who spent most of my working life without superannuation. Public servants had it but the rest of us didn't. Paul Keating introduced compulsory superannuation in 1992, I started work in 1964, and from 1992 until I retired at 55 I ran my own business. When I retired, I had a meagre $20,000 in super.
    I think one of the best things to do is to pay your house off before you retire, at whatever age that is. We did that and it allowed us to change the way we lived and work with the money we had. We are now on a pension and I'm glad to say our bank balance has increased every year since I retired.

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    1. Being debt free is an absolute necessity, yes. I am fascinated at how 'the pension' had nearly a cult following once upon a time. It was a positive part of the fabric of our taxation and social consciousness .... until it was not. My only criticism of 'the pension' is that it did not encourage Australians to save to invest. Super is not really any better, but for those interested it at least allows good levels of user involvement. It is a fascinating social subject that really gets my mind a-whirring. Anyhow, theorizing is all well and good, but taking action is the answer as you always fully demonstrate.

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  3. I'm at stage two, taken my pension's early, less money but I don't now work. I have almost three years before my state pension starts. Hubby is fully retired living on private and state pensions, our house is paid for, so we are comfortable. BUT we started planning in our 30's to ensure at this point we are financially secure.

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  4. Hi Phil, This is another terrific Finance post that is simply explained and very easy to understand. The sound advice in your posts have helped me to restructure my superannuation, and to give me greater confidence in my financial future. A great feeling to know that I can enjoy my retirement with enough money to be comfortable. I'm sure there will be many other readers who's financial futures have been secured with your help. With gratitude, :-)

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    1. I sincerely hope so Sally. It is great to be able to freely contribute and empower others.

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  5. Phil I loved this post! Thank you, you have put my thoughts into words. I am on the threshold of taking the leap into early retirement... I have actually filled in my leave forms to clear out my LSL with no intention to return... but am hesitating.. I keep thinking "why am I leaving a well paid, local job?" however, the toll on my health as I get older, with stress etc... and seeing more and more friends buried before their time is pushing me to take the leap.
    Kim from Sydney

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    1. Kim. Cashing in your LSL may not be tax wise. Have you thought of just taking your LSL and having a trial retirement and deciding at the end of the LSL period? You might even be able to take it at half pay and have twice as long off? Just a thought. Easing into retirement is important.

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    2. Hi Phil, yes that's what I'm doing - taking the leave, so I will have about a year of paid leave and can decide whether to return or not (cannot imagine going back to the stress, but who knows?)

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  6. I am the other option, retired 20% (one day a week) when I was 45. I did my homework at forty, paid debt, sold large house, and now live frugal, still save and have the best of both worlds.

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    1. This is also a great method - I'm yet to write about that. I will leave it till I am actually doing it I think. Then I will be truly qualified to comment.

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  7. Doing some part time work, even a tiny bit, will decrease the amount of investments you need by a gigantic amount.

    If you can earn just $100 per week doing some random work, even hobby related, then that's $5k per year. This is just as much as $100k of shares will provide.

    Little increments of income make a big difference. But you already know that since you have a few part time hobby gigs in mind from what I remember :)

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    1. Thanks Dave - very wise. Many writers talk about never retiring for mental reasons, but your maths above also gives some pretty good fiscal reasons too.
      Yep, I am working on developing several smaller income streams that will carry on well into retirement for that very reason.

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