superFIRE -  Optimising Australian Early Retirement with Super and the Pension

Personal finance is said to be always personal, and it is, however, an early retiree should seek to optimise within their pension. Each respective country’s approach to their pension may reflect a core nature of their spirit. For example, beyond age restrictions, Australia and United States have almost the inverse systems. United States pension (social security) is not means tested, it is income tested, i.e. to be eligible you must work and pay payroll tax. Thus, rewarding the workers with a pension. Whereas, in Australia, there is no income requirement (payroll) just age and also (low) assets, supporting the battlers. The pension is a core component for more people’s retirement and should be a consideration even for an Australian financially independent - early retiree, for it at worst offers a backup if their plan blows up.

The following table is a very basic breakdown of pension systems:

CountryEligabe Age Earning Qualification Means Testing Means Testing (Single) Mean Testing (Couple) Approx Monthly Payment (Single)Monthly Payment (Couple)
United States62+10 Years Work + CreditsNo N/AN/A $1502 USD$2582 USD
Australia67+ N/AYes $3111 AUD < 270k FULL Up to 588k Part 405k Full - Part up to 884k } $2064 AUD$3111 AUD

There are similarities in the two pension systems, such as the payment but the key difference is the eligibility. The Australian means testing has caused many to argue that it  disadvantages the prudent who have successfully earnt, saved and invested. Both the US and Australia have its “second pillar” to retirement funding, self funding. Using financial vehicles such as ROTH IRA etc and Superannuation. Both retirement pillars are only accessible without penalty from 60 and are tax advantaged. Roth IRAs don’t pay any tax whereas Super pays 15%, however, an ROTH is not tax educable on entry. 

Typically, an Australian FIRE advocate would seek complete self-sufficiency. While independence is a worthy goal, is it the optimal goal? The FIRE devotee certainly would pay a significant amount into the tax system, meeting the US requirements. Social security access rules depend on the amount paid into the system, setting the Americans' perspective that the pension is an entitlement. As an avid reader of the ESI Money I cannot recall many millionaire interview(s) not willing to take the Social Security pension, despite their multi-millionaire status. However, in Australia the system is (marketed) differently, its not a payment to be counted on in the future and certainly not for the financially "well off". Regardless, the purpose of this post is not a social commentary but to help an individual or couple plan and perhaps reduce their working life. 

So, if we wanted to optimise within this Australian system, here are four sources of finance for an Australian Early Retiree:

  1. Early Retirement - save enough taxable capital that will be sufficient until the age of 60.
  2. Super - super fund enough to last seven years and enough to pay off the mortgage.
  3. Pension - from 67 you can access the part pension like a traditional retiree.
  4. Full Pension - full pension, you still have enough to keep your lifestyle more comfortable with some assets. There are reverse mortgage products that could be considered to further support a more lavish lifestyle in your final years.

While the early retiree is never technically "Financial Independant" they certainly are wealthy and since FIRE is such a cool label, I propose to call this PensionFIRE. Or even cooler, Early Retirement Unextreme (ETU). It's unextreme because this is what a great deal of Aussies pensions do. It is just not really discussed in polite conversation. Most Aussies start their retirement planning late, in their late fifties or sixties. Often leaving early retirement an impossibility.

Let's break down PensionFIRE with a lean example with a couple at a 40k expenses pa. REAL 5% return and early retiring at 40:

StageAgePresent Value (Today)Future Value (At the Stage)
Early Retirement< 60500kN/A
Preservation Age60100k250k 
Pension67+150k500k
  Total: 750k 

This highly optimised example shows that a PensionFIRE needs a present value of 750k invested. This is a reduction of 25% compared to the traditional 4% rule or 1 million of invested assets to traditionally FIRE. 250k depending on your savings rate is a significant amount, potentially saving someone from 5 to 10 years of work. 

This scenario also works for families who have higher expenses today but will eventually fall inline with a lean retirement income. So extending the lean example with 70k expenses over 20 years would require 875k of capital, so 1.125M. Again, this shows how a couple could retire with far less than the 2M of assets.

Yes, this example is primed for perfection, meaning it also offers little in redundancy learning to the pension stage. However, the biggest criticism I would expect is the ethics of such a plan. For a typical Aussie, it seems like I'm proposing something unethical and I propose that such a person would be “milking the system”. Perhaps, but this milking is the reality for most retirees, intentionally planned or not. Is not early retirement just another consumption, instead of buying a Maserati, private school or overseas holidays they buy less stuff and buy free time instead. Shouldn't they be able to do this? I think so.

The other argument against this approach to planning is that the government will change the rules. This is certainly possible, but there are plenty of risks for any long term plan. Any retirement is built on assumptions. But policy changes are relatively predictable, unlike the market! For instance, the preservation age increase, which was last changed in 1994 and was grandfathered for people between 34 and 38. For most PensionFIRE should be a backup plan as there are no guarantees in life, especially later in life. Anything could happen, but the pension system is as old as the Federation. 

In summary, PensionFire is the unplanned strategy of most Australians. Yes, there is plenty of risk planning on both the market and the government welfare. However, I think it’s safe to argue that government policies change far less than the market. Market commentators instead have jawbone uncertainty to sow doubt. But no plan is guaranteed, less so with a multi-decade one. While I don’t intend to enact this system myself I think it’s a good backup. Allowing a less conservative approach with higher withdraw rates enables retirement as early as possible.  The pension is the default approach for many Australians who like to spend big and save the minimum. With PensionFIRE, Aussies who value their time can retire sooner and worry less about the future.

 

Further thoughts and notes:

  1. Means testing of super leading to pensalising savers has lead some to call it a "retirement trap".
  2. We can optimise FIRE to include the Australian Pension saving years off work.
  3. Super - can provide 7 years of additional freedom. No wonder the concessions from the government are so generous to funnel you into financial independence.
  4. Pre-tax capital is critical to early retirement.
  5. There is possibly more optimisation to explore in paying extra into super over a mortgage. 
  6. Housing is excluded from the asset test, hence a highly priced home not only offers a retiree a nice place to live but also optionality for a reverse mortgage funding. 
  7. Thanks to /r/fiaustralia bnenene for the name superFIRE and theyrealldeaddave for the ideas and support of the concept.
  8. Perhaps the UK, or Canda or NZ are better comparsions, an idea for a future post.

 

 

This article was updated on September 11, 2021

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