Unexpected retirement: how to cope with being forced out of work early
This report was sponsored by BT but was independently researched and written.
Out of the blue you get some shock news that forces you out of the workforce.
A company restructuring could mean you are facing a redundancy; or you receive unexpected news about your health; or a loved one needs you to care for them; or your adult kids require your grandparenting skills so they can participate in the workforce.
It means you are suddenly retired, years before you had planned to. It can be traumatic and few people are prepared - emotionally and financially - for a sudden end to their career.
For many people the peak earning years are the 40s and 50s, not the 60s, says David Knox, senior actuary at Mercer. He points out the average retirement age is 63 - four years short of the age pension age, if born on or after January 1, 1957.
He says people suddenly find themselves retired and may be able to find only part-time work.
For example, only 62% of 60- to 64-year-olds work full time while 38% are employed part-time. This is sharply lower than the 71% of people aged 55-59 who work full time and the 29% who work part time.
"It is quite a complicated problem," says Melinda Howes, general manager of superannuation at BT.
She says if you are in your 50s you probably belong to the "sandwich generation" wedged between teenage or adult children and ageing parents with plenty of financial commitments.
Howes says everybody should have a plan in place no matter how secure they think their job is.
"It can happen to anyone in any industry," she says. "If this happens to you it is going to be quite an emotionally traumatic process, so it is good to have thought about it ahead of time."
Howe's advice is to run a "what if" scenario long before anything happens for your own peace of mind so you don't panic when it does. Ask yourself: "How would I get on if my income stopped?"
But financial planner Jonathan Philpot says preparing for the unexpected is difficult. It requires saving and planning.
"In an ideal situation, if you are able to reach the sum of money that will provide for a comfortable retirement before your planned retirement date, this will give you some level of flexibility if you were forced to finish work earlier than expected," he says.
What do you do?
Don't freak out or rush to make any major financial decisions such as selling your house or cashing in your superannuation.
They could have drastic implications for your future, often sparking tax liabilities or preventing you from claiming benefits from the government.
"If you have some money available, it will give you peace of mind and you don't have to panic from day one," says Howes.
Work out your entitlements
If you are made redundant, hopefully you will receive a payout with your unused annual leave and long service leave. Long service and annual leave are taxed at 32%.
If you are on a high tax rate of 39% or 47%, this is beneficial.
Working out the tax on your genuine redundancy payment depends on how many years you worked for the company. There is a tax-free limit but only if your job needs to be abolished and you are terminated.
Everyone has different circumstances.
Philpot gives an example of Berta, who receives a $100,000 redundancy payment. Of this, $62,399 would be tax free and the remainder is an employment termination payment (ETP) of $37,601.
The tax on this amount depends on whether you are under or over preservation age. For example, a 61-year-old pays 15% tax on the ETP but a 55-year-old would pay 30% and both must pay the Medicare levy on it.
You can't receive the age pension until you are 65 or older (depending on date of birth) and if you are in your late 50s you will need an income.
There are other government benefits, such as Newstart, that you can apply for if you are looking for work.
If you are over 55 you will need to spend at least 30 hours a fortnight on either voluntary or suitable paid work to qualify for a maximum of $555 a fortnight.
If you have a medical condition that stops you from working 30 hours a fortnight, you may qualify for the disability support pension, which pays up to $926 a fortnight for a single. Or if you are caring for someone with a disability or who is elderly and frail, you can get a carer's allowance.
Change career paths
Philpot points out that the reality for those who lose their job is that they often need to find replacement work. It may not be with the desired income but they need something, even part time, to support their lifestyle.
Every dollar earned means you don't touch your savings and super. If you work part time for a while, you have the time and flexibility to look for a job you want.
Age discrimination means it takes those unemployed over 55 an average of 68 weeks to find a job compared with 49 weeks for 25- to 49-year-olds.
Howes suggests you consider retraining if you are in your early 50s as you could have another 20 productive years ahead. Empathetic workers with good people skills are in demand in the workforce.
Can you access your super?
To access your super, you need to have reached your preservation age and have permanently retired from work.
If you are working part time and over 55 you could set up a transition to retirement income stream (TRIS) so you can access your super to help top up your income.
Howes says you need to look into this carefully to see if it is worthwhile, as the government has cut some of the strategy's earlier tax benefits.
A tax-free pension from your super fund in the form of an account-based pension will only commence after age 60, so it may not be the best tax outcome to commence a pension in your 50s.
If you have a major illness or are in severe hardship you can qualify for the release of some of your super. Contact your super fund.
Does your insurance help?
Insurance can only be claimed if you are ill or injured and prevented from working.
Some people think that salary continuance or income protection insurance will support them if they are made redundant, but it is only for illness or disability unless it has a special feature for unemployment.
Philpot says losing your ability to work because of a health emergency highlights why it is important to maintain a level of personal insurance cover. If you have substantial savings to support you in an emergency, you are effectively self-insured.
Can you afford to retire?
If you retire early you may have to use your super to bridge the years leading up to the age pension.
Work out how long your super will last by using a calculator such as the one on the MoneySmart website to see if you are on track.
A simple rule is a 10% drawdown test, says Philpot.
If you want to have $50,000 to live on in retirement and you have $300,000 in retirement savings, this means that you would be drawing about 17% in the first year and an even greater percentage in the second - and clearly the earnings are never going to get close to what is being withdrawn, he says.
However, at 10%pa this would mean the person would need $500,000 of savings and at a long-term earnings rate of 7%pa the money may last for the rest of their lifetime.
"However this is a big 'may'. If a GFC was to hit at retirement your earnings would be negative and by drawing 10% per annum you will again quickly run out of money."
Philpot prefers a drawdown rate closer to 5%-6% to have greater confidence that money will not run out in retirement.
Retire on your home
When you own your own home, you are living rent free and better off than if you pay rent. But the number of Australians owning their own home is falling, says Knox.
If you own it you can also use your home as a cashbox. Consider taking in students or short-term travellers if you have spare bedrooms. You can also downsize or take a sea change or tree change to an area where property prices are cheaper.
"This is a really big decision that needs to be carefully considered," says Philpot.
"I often hear, as part of retirement planning, that people will downsize and have some capital for retirement. In reality I see very few people realising capital from the selling of the family home. They often move to a better suburb or closer to children and in the end, after all the transaction costs, have very little extra to put into retirement."
Once you are 65 or older and you meet the requirements, you can add up to $300,000 from downsizing your home to your super fund.
It doesn't count in your contribution caps and it can be made even if your super balance is more than $1.6 million.
Philpot says the downsizer contribution may start to encourage more people to properly consider it as a strategy to build wealth outside the family home.