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Retirement

Types of retirement plans you should know about

  • June 25 2019
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Retirement

Types of retirement plans you should know about

By Louise Chan
June 25 2019

There’s no specific retirement age in Australia, but people tend to believe that your retirement happens when you finally stop working in your senior years. This is when you’ve accumulated enough retirement savings to enjoy a life without gainful employment.

Types of retirement plans you should know about

Types of retirement plans you should know about

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  • June 25 2019
  • Share

There’s no specific retirement age in Australia, but people tend to believe that your retirement happens when you finally stop working in your senior years. This is when you’ve accumulated enough retirement savings to enjoy a life without gainful employment.

Types of retirement plans you should know about

However, many people have proven that there’s more than one way to approach retirement and that there are different types of retirement plans that can be implemented depending on their objectives and preferred lifestyle.

Below are four popular kinds of retirement that people commence.

Traditional retirement

A traditional retirement refers to the type of retirement that most people are familiar with – when you work throughout most of your life and terminate employment when you reach your senior years. This requires a holistic retirement planning to ensure that you are fully prepared once you start transitioning to your retirement stage.

But things don’t always go according to plan, and there are still three retirement lifestyle paths you may take, whether intended or not.

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Reliant retirement
Reliant retirement is when the retiree has to rely on financial help or move in with their children or relatives because they are not financially ready to go into retirement. It’s a type of retirement that no one really aims for but are forced into because of the retiree’s financial circumstances.

Retirees may also be reliant on government pension to supplement their inadequate retirement savings. Likewise, they may resort to selling their assets or availing financial products, such as a reverse mortgage, in order to financially meet their needs.

You may experience a reliant retirement if, for instance, you are forced into retirement without adequate money in your savings account or while you have a low super balance and you have no way of returning to work due to your personal circumstances (i.e. poor health condition).

Drawdown retirement
The drawdown retirement is what usually comes to mind when people think about retirement. It’s when you grow your nest egg throughout your working life and use the money you saved in your retirement account or super.

In most cases, the retirement income stream from your nest egg is enough to satisfy your needs and meet expenses. This allows you to enjoy a decent lifestyle without the need to return to work to supplement your retirement income stream.

Independent retirement
As the name suggests, independent retirement is when retirees don’t need financial assistance from the government or their relatives. They have a large enough retirement nest egg to meet their expenses and enjoy a comfortable lifestyle.

Independent retirees are usually those who took the time to create and follow a sound retirement plan or worked on attaining financial independence prior to retirement. In most cases, independent retirees have cleared their debts, if any, and already own their home before commencing their retirement.

They may also have made voluntary contributions, taking care not to exceed the prescribed contribution limits so they don’t pay tax on the excess.

Early retirement

Everyone has their own idea of retirement and how to achieve it, but there’s really no single approach to planning and commencing a retirement.

Many employed professionals grow their nest egg throughout their working lives and aim for a traditional retirement. However, there are people who quickly work towards their financial independence to achieve early retirement – in their mid-40s or earlier.

Not everyone can commence an early retirement because this would require a person to have a large income that they can stash in a fund or account outside of super and it should last until they reach preservation age and unlock their super.

This means they have to start saving and investing with the aim of achieving high returns that will enable them to replace their employment income while contributing to their super.

Another important thing is that they should be debt-free before they commence an early retirement. Eliminating debts early on can help increase the amount of money that is saved and/or invested for an early retirement fund.

While this may seem hard for some people, early retirement is achievable through smart financial planning and the help of a financial adviser, if needed.

Semi-retirement

Semi-retirement is a bit like early retirement in the sense that the retiree isn’t required to work a full-time job because they have achieved financial independence – but they can work if they want to. Since being gainfully employed is no longer a necessity for them, semi-retirees tend to focus on achieving a sense of work-life balance by winding down their employment activities.

Semi-retirees may continue to work in their place of employment in a reduced capacity or completely changing their place or type of employment. If you choose to go on a semi-retirement, for instance, you may continue to work in a part-time capacity for your current employer or switch jobs to one with a lighter load. The point is that the compensation is no longer your main concern, so you can simply do whatever work interests you.

Financially independent pre-retirees may already have a chance to become semi-retirees when they commence a transition to retirement because their transition to retirement income stream can already cover most, if not all, expenses.

Working retirement

Working retirement is basically a type of retirement wherein the retiree continues with their income-producing activities even when they have retired. 

“In January 2018, Australians aged 65 and over had a workforce participation rate of 13 per cent (17 per cent for men and 10 per cent for women), compared with 8 per cent in 2006 (12 per cent for men and 4 per cent for women).”

However, employment may be retained out of choice or necessity.

Voluntary working retirement
Some people don’t really wish to leave their work behind once they reach a retirable age, so they opt to go on a working retirement instead. They may, instead, work in a different capacity (i.e. consultant) or take on similar work either in the same or a different sector.

This is usually the case with retirees who own businesses and may either be not prepared to hand over the reins to their company yet or are simply invested in the work they do. One good example is Warren Buffett – one of the prominent figures who, despite having an estimated net worth of $122.6 billion (US$86 billion), continues to work in his multinational holding company, Berkshire Hathaway.

However, voluntary working retirement may also be borne out of the desire to ensure one’s financial independence longer. That is, some retirees may wish to further grow their nest egg to address potential longevity risk, especially at a time when Australian life expectancy increases each year.

Unintentional working retirement
This type of working retirement is typically borne out of necessity for a variety of reasons. For instance, the retiree may not feel financially prepared to commence a full retirement. This is usually the case with low-income earners. There are also those who were simply unable to make enough contributions to their super and/or other retirement savings account and may not have an assurance that they can be financially independent in retirement.

According to statistics from the Australian Institute of Health and Welfare, many senior-aged Australians continued to work despite reaching pension age (65 years old) – the average age that  Australians retire.

To ensure that you will be financially prepared for your own retirement, it’s best to create a retirement plan and invest wisely to take advantage of the time value of money.

Explore Nest Egg for more information on retirement and earning.

Types of retirement plans you should know about
Types of retirement plans you should know about
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About the author

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Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

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