Retired actuary and author John De Ravin knows our retirement income system can be complex and, to help, has written a book of financial strategies, including chapters for pre-retirees and retirees. In this extract from Slow and Steady: 100 wealth building strategies for all ages, he explains who would benefit from continuing to work part-time.
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Read this strategy if:
- you recently retired from full-time work or are about to retire from full-time work but still want to get the satisfaction that comes from doing some paid work
- if you receive a part Age Pension, your Age Pension entitlement is determined by the assets test rather than the income test.
Background
So, you have reached an age, probably between 55 and 65, when people think about retiring. You’ve been in the workforce for at least three, probably four, and maybe even five decades, and you’ve had enough, right? You just want to get the hell out of there and never go back?
Key point
There are two important reasons why you might consider some part-time work, either by phasing down your involvement with your existing employer (if your employer permits it) or by finding some suitable alternative part-time work.
First, the income you can earn from your part-time work can supplement your semi-retired lifestyle, so that you can afford to cease full-time work earlier than if you had no source of earned income in semi-retirement.
Second, what many of us forget when we are in the middle of our demanding jobs is that there are many benefits of work, quite apart from the fact that our employer pays us to turn up for 40 or so hours a week. For example:
- our workplace is a social environment; we get the opportunity to meet and enjoy the company of our work colleagues
- depending on the nature of our jobs, work can give us a sense of purpose and achievement. This is so much a part of our working life that we tend to forget it until we are not working anymore. People count on us to do our jobs.
I am certainly not saying that it is not possible to forge a happy and meaningful life in retirement without any work, but I am suggesting that it is important to plan what we will do in retirement that will give us a sense of purpose in our lives. It has been shown that the health outcomes are very poor for those who are fully focused on their working lives, then suddenly are retired and have nothing to do.
Part-time work for a period of time may have both financial and social benefits.
How to do it
If you are basically happy in your existing job but just want to start to slow down a little, it makes sense to approach your employer and ask if there is any possibility of reducing your working hours. For example, if you currently work full-time hours, you might be interested to transition to retirement, commencing with (say) a three-day week, or maybe a four-day week but with shorter working hours per day. The additional leisure time will give you a chance to start to work out how you would spend your time if you were fully retired, without losing contact with the social and financial benefits of being employed.
What does it mean for you financially?
On the face of it, earning part-time income means more money for you to spend. However, you need to factor in both taxation implications and social security implications before you can work out how financially attractive it will be to work part-time.
The means testing of the Age Pension works via two separate tests: the assets test and the income test. Whichever test produces the lower amount of pension is the one that applies. For every dollar of earned income in excess of the lower income threshold (other than the first $300 of fortnightly income from employment as an employee, which is exempt from income testing under the terms of the Work Bonus), if you are a part age pensioner who is governed by the income test, you will lose 50 cents of Age Pension.
While the 50 per cent effective tax rate is very high, not all age pensioners will be affected by the income test, especially if you (and your spouse, if you are a couple) have smallish amounts of earned income but significant assets.
Case study – Jamie
Jamie is 66, single and is about to retire from full-time work. He owns his home and his only other asset is his superannuation balance of $400,000. He is considering whether to work part-time to bolster his income. He expects to receive a part pension. How much income can he earn before his Age Pension will be affected?
The means testing of Jamie’s Age Pension entitlement applies the assets test and the income test, and the Age Pension will be paid according to whichever of the two tests produces the lower entitlement. Jamie’s financial assets of $400,000 will reduce his maximum pension entitlement by 7.8 per cent of the excess of his assets over the asset threshold for the full Age Pension. As a single homeowner his lower assets test threshold is $263,250, so his pension entitlement will be the maximum Age Pension less 7.8 per cent of $136,750. So, under the assets test the reduction to his pension will be $10,667 per year.
Under the income test, Jamie is allowed to earn $174 of fortnightly income, or $4524 per year, before the 50 per cent taper rate starts to apply. However his financial assets are deemed to earn income, with the first $51,800 being ‘deemed’ to earn 0.25 per cent (this part produces deemed income of $130 per year) and the remaining $348,200 being deemed to earn 2.25 per cent or $7835. So Jamie’s total ‘deemed’ income is $7965. But because Jamie can earn the first $4524 before the 50 per cent offsetting comes into play, the part of his income to which the 50 per cent applies is $7965 less $4524 or $3441. Of itself, this would reduce Jamie’s maximum pension by $1720 but the assets test already results in a reduction of $10,667. So only when the pension 50 per cent taper applies to reduce his pension by a further $8947 will the income test affect Jamie’s pension.
This means that Jamie can afford to earn a part-time income of twice this amount (that is $17,894 per annum, or $688 per fortnight) before his pension will be affected.
So if Jamie can find work that he enjoys and which will pay up to $688 per fortnight, he will enjoy the whole of this additional $17,894 of income with no tax implications and no social security implications. He will still receive his part Age Pension of about $13,885 per year plus his $17,894 from his part-time job plus the income from his account-based pension. He will have to draw down five per cent of his account-based pension per year, or $20,000, so his total income will be as follows:
Age Pension $13,885
Part-time work $17,894
Account-based pension $20,000
TOTAL $51,779
Bearing in mind that Jamie will pay no tax on this amount of income due to the operation of the Seniors and Pensioners Tax Offset (SAPTO), this level of after-tax income should provide Jamie with a comfortable existence.
The analysis above assumes that Jamie’s part-time work is in his own business or in a self-employed capacity. If his part-time work is as an employee, he will also benefit from the Work Bonus under the Age Pension income test. In that case, the first $300 of fortnightly earnings are exempt from income testing so he can earn an additional $300 per fortnight ($7800 per year) before his age pension would be affected. In that case, his total income (before tax) will be:
Age Pension $13,885
Part-time work $25,694
Account-based pension $20,000
TOTAL $59,579
In this case, he will pay some tax because his taxable income (i.e. his income from the Age Pension plus his income from his part-time work) is $39,579, which is a little over the current tax-free threshold for someone entitled to the SAPTO, which currently stands at $32,279. However, the tax Jamie will pay is minimal in relation to the additional $25,694 of spending money that he has due to his part-time work.
Factors to take into account before you decide
Of course, it’s important that you are able to find a part-time job that you are interested in doing and which you are qualified to do. There is no point in doing a job that you hate! And you would want the job to be reasonably nearby – you probably won’t want to travel great distances to get to and from work.
For Jamie in the case study, assuming he earns income at a relatively modest rate of $20 per hour, he wouldn’t want to work more than about 17 hours a week or his Age Pension entitlement will start to be affected (or much more than about 25 hours per week if his work is as an employee so that he benefits from the Work Bonus). Once the income test starts to apply, Jamie will encounter a 50 per cent effective ‘tax’ rate in the sense that he will lose 50 per cent of any excess income via a reduction to his Age Pension.
Slow and Steady is available from John De Ravin’s website for $39.95.
Do you work part-time? Are you motivated by the social connection and sense of purpose as much as by the money you earn?
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