Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 13

Putting off that retirement speech

It is a question most working Australians face – when is the right time to retire? When do we punch that time card for the last time and make our farewell speech, thrilled to be stepping into the world of retirement leisure ? Well as with many decisions, it is complex, personal, and hopefully, voluntary. Finances are an important component but non-financial elements such as health and work enjoyment are also vital. How these elements are weighed up depends on personal preferences.

Benefits depend on income level

From a financial aspect the benefits of deferring retirement differ across the population, largely depending on income levels. To explore this further we need a measure of retirement outcome. This in itself is a somewhat controversial area. It is common to use a replacement rate measurement. This measures the retirement income (age pension, drawdowns from an allocated pension, and payments from income stream products) as a percentage of pre-retirement income. Treasury advance this gross measure further by using an expenditure replacement rate which takes into account taxes paid and savings made; essentially it compares what we have available in retirement as a percentage of our pre-retirement expenditure levels. I concur with Treasury’s approach.

If we defer income there are two somewhat obvious but important financial implications. The first is that we do not draw down on our superannuation savings. The second is that we actually make further contributions to our super accounts. The net effect of this is that instead of beginning the process of drawing down on our retirement savings account for the rest of our lives we actually add to our savings and then when we do retire, we are drawing down on those retirement savings for fewer years. The financial impact of this deferral process will differ across households, largely based on income levels. For lower income households the age pension will make up a large part of retirement income, whereas higher income households will be relying more on their own savings to fund their retirement. It is higher income households who experience a more substantial improvement in retirement outcomes by deferring retirement.

The exact effect on financial outcomes is unknown. Why? Well simply put we do not know our financial outcome. There are many sources of uncertainty the most significant being variability in real investment returns and age of death. However we can estimate the impact through using simulation. I undertake such calculations in an academic paper I wrote in 2011 titled “Variability in the Projected Financial Outcomes of Australians.” The results are summarised in the table below.

As we move across the table we move from low income to high income levels (based on a multiple of average weekly earnings (AWOTE). So 1.0x means a household on average earnings).

The last line in the above table represents the annualised expected improvement in replacement rate outcomes. It is clear that retiring is a more financially important decision for higher income households relative to lower income households. For example, someone earning $175,000 a year can improve their retirement outcome by a healthy 6% by delaying retirement only one year.

Treasury undertook similar analysis as supporting information for the Henry Tax Review. The numbers are not exactly the same (we do not know all the assumptions and details of Treasury’s modelling) but the theme is consistent that deferring retirement increases expected replacement rate outcomes and that the increase is larger for higher wealth households. This forms part of the reason Henry recommended changing both the age pension eligibility age and the superannuation preservation age to 67.

Permanency of retirement

An important related issue is the permanency of the retirement decision. Is it possible to return to work once one has retired? This represents flexibility which could prove valuable if financial hurdles are experienced early in retirement. While Dame Nellie Melba and John Farnham have been able to make countless comebacks and farewell tours, it is generally not as easy for most people to re-enter the workforce. This will differ by occupation and characteristics of employers and the retired potential employee.

However retirement is not just a financial decision, though the finances are very important. A very important aspect is health. Health and mobility may restrict one’s ability to travel in retirement, be an active grandparent, and enjoy an active retirement lifestyle in general. Say at 65 someone believes they only have 10 active years left before they anticipate switching to a less active lifestyle. Then the decision to defer retirement by a year represents giving up 10% of their expected active retirement years. That is a big issue to weigh up. Imagine the frustration of having the retirement income stream to support an active retirement lifestyle only to find the body is not willing. Think of this as a form of regret risk.

Of course this article frames work and leisure in a black and white format: work as dutiful and retirement as leisure. Much of the academic literature reflects this same notion. However it is possible to enjoy and derive leisure from work. If so this may make the decision to defer retirement an easier one – why give up something enjoyable which provides an income? As Nobel Laureate Robert Merton said on the decision to defer retirement:

Look at how much cash it would take to generate what you generate yourself with your own human capital. And if you generate that cash by doing what you like to do, rather than hitting balls around a golf course, you have a good deal.

This highlights the merit of actively positioning to have the ability to extend a working career as a conscious choice. This obviously requires foresight, which may entail the explicit decision to seek further education or change career paths. And of course some good luck in the form of a few career breaks would not go astray.

The message is clear. If you are close to retirement, consider your finances, health and retirement lifestyle objectives. If you are younger, focus on a career which you enjoy and create some flexibility around your retirement decision.

 


 

Leave a Comment:

RELATED ARTICLES

Retirement adequacy: COVID means we need to work longer

Living the lifestyle you want in retirement

Retirement spending: set the bar lower

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.