Retirement

What is retirement today?

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth, SuperConcepts Sydney, Australia

If you search ‘retirement’ on the internet you’ll find things about superannuation savings, retirement villages and nursing homes – but what you won’t find is a definition of what retirement is.

A dictionary will tell you that retirement is ‘withdrawing from an occupation or an active working life’. That definition may be a bit behind the times, so what is retirement today, exactly?

Retirement redefined

Retirement is a relatively new concept which probably developed because of better health care, increased life expectancy and greater levels of retirement savings. A hundred years ago retirement probably didn’t exist as most people lived to work for their whole lives rather than worked to live as we do today.

If you are in your 50s or 60s you will probably have 20 or 30 years of active life before you slow down. But, how many people in their 70s do you know who do ‘stuff’ and lots of it too? Some have part time jobs, some travel, while others combine looking after the grandchildren with a wide range of social activities. But are they retired

What is retirement?

It might be helpful to consider different types of retirement like retiring from earning an income, retirement after reaching an age, receiving superannuation benefits, retiring from travelling or retiring from certain social or sports activities.

As illustrated above, retirement these days seems to account for many states, which lie on a continuum from permanently ceasing work to mini-retirement. So, let’s look at some of the different ways in which you could be ‘retired’.

  • Traditional Retirement

In the 20th century, you got a good job, worked hard for 40 or 50 years, and then you retired around age 60 to enjoy the last 10 or 20 years of your life. Retirement was funded mainly through the age pension, personal savings, and possibly superannuation. Traditional retirement was challenged by the late 20th century and moving from job to job was more common.

  • Early Retirement

Because of significant improvements in living standards in the late 20th century, early retirement became a reality when people had saved enough to stop working well before the traditional retirement age. This would have been impossible in the 19th and early 20th century.

  • Temporary Retirement

Temporary retirement is all about working, stopping work for a while, and then going back to work. An example is when you stop work to study, travel or bring up your family with your partner being the main breadwinner.

  • Semi-Retirement

Semi-retirement is about finding a work-life balance which could mean you may reduce the time spent at work in your current job to part-time or casual employment. It could mean a complete change to a lower paying job but with a greater sense of satisfaction. Semi-retirement could simply mean supplementing your investments or super with a job at the local coffee shop or fabric store.

One of the biggest advantages of semi-retirement is it allows you to move away from the daily grind much earlier than you might otherwise have done. Even if you're not ready to quit work entirely, you may find less stressful and/or more fulfilling work. Your financial needs may not be great, so a job based on income may not be that important.

  • Mini Retirements

Rather than take early retirement, temporary retirement or semi-retirement why not take smaller breaks right throughout your life rather than putting the break off until work has stopped completely. For example, you may work for five years, take a few years off, work again for a short time and so on. A mini retirement combines work and retirement at every age but on the downside, you may not be able to build up your savings pool for when you finally stop working altogether.

Which type of retirement works for you?

What's important to understand is there’s no one right way to retire. Maybe retirement is reaching financial independence when work becomes a choice and you can pick and choose what you do. That choice may depend on your health, your passions, your savings and your goals.

Achieving retirement

Choosing the time you will retire depends largely on your savings pattern. Saving in your 20s or 30s can be better in the long term rather than your 40s and 50s as it will probably cost a larger portion of your income. The longer your money is in super the greater the benefit from investment earnings and the effect of compound interest will be. But many people are unwilling to save for retirement or make lifestyle changes to save that early in order to afford a comfortable retirement.

Although most people have dreams of being able to retire in some capacity, many don't have enough saved to stop working. Future retirees may find themselves working longer than they wanted to because they didn’t accumulate enough during their pre-retirement years.

An alternative, if you don’t have enough to retire on as you approach retirement, is to consider part-time retirement, where you find work that you enjoy, even if it pays less. Ideally, it will cover your living expenses and gives your retirement money time to continue to grow before you must use it for income.

How to invest your retirement money

As you get closer to retirement you will want to monitor your retirement investments closely. Take time to learn basic investing concepts so you understand how your retirement investments produce income for you later in life and how much income they might produce.

You will also need to decide where you keep most of your retirement money. This could be in conservative investments, a balanced portfolio or using a growth strategy.

Aside from when and how you retire, one of the biggest decisions you will need to make is how much to spend in retirement. If you have super, you will need to decide whether to take a lump sum or an income stream and determine how to make it last for your life time.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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