Scaling down to retirement – tips and tricks
I was speaking to a good friend who had ‘retired’ a few months back. To them, retirement was all about staying occupied and interested in life whether it was being paid, working as a volunteer or continuing with their thirst for learning. She thought it would be busier than full-time work, which it proved to be. How do you get ready for a change like that, I wondered?
These days ‘retirement’ is different to our parents’ generation, as it’s about a change in activities, whether paid or unpaid. Some people sit in front of the TV while others get out there and do things.
As my friend said, there’s lots of ways to ‘retire’ and there’s no need to go head first into ceasing full-time work. It may happen gradually as you transition into other things but you need to make sure you have enough to live on and get things done.
Getting things done means access to savings to provide enough to live on. Questions like:
- Should I keep the house and for how long?
- Do I get a new car or keep the one I have?
- Will I move closer to town or go on an overseas holiday?
- Could I move in with someone else?
- Should I move closer to the children?
- How much will it take for me to live on?
These are difficult questions to answer but you will need to find a good balance. Whatever you decide, the question may come down to this: If I retire from full-time work can I afford it or is it necessary for me to keep working so I can afford to retire?
How much you need to retire on and do the things you would like to do is the hardest answer of all to work out. What do you need for every day spending and what do you keep in the piggy bank for the inevitable rainy day? That’s something only you can attempt to answer. From the evidence available, it seems that in theory to lead a comfortable lifestyle you’ll need something near $60,000 p.a. and if you are looking at a lump sum equivalent then something in the vicinity of $500,000 at retirement is close to the mark. However, it seems that many people in retirement live on a monthly income of between $2,000 to $3,000. Whatever the amount required, planning is necessary to make sure you have the right amount at the right time.
There are many ways to save for retirement – personal savings, sale of your business or superannuation to name a few. None is the completely right answer but some do provide tax incentives which make it all the better.
Take superannuation for instance.
It provides tax incentives on contributions, income earned on the fund’s investments and when lump sums or pensions are paid from the fund. The tax incentives for contributions can include:
- tax deductible contributions of up to a total of $25,000 p.a. without penalty,
- non-tax deductible contributions of up to a total of $100,000 p.a. without penalty, depending on the total amount you have in super. If you are under 65 you may have access to the bring forward rule which can allow non-deductible contributions of up to $300,000 at anytime during a fixed three year period,
- co-contributions of up to $500 for low income earners,
- low income earning spouse tax offset of up to $540,
- downsizer contributions of up to $300,000 if you sell your main residence after reaching 65, and
- small business CGT concessions on the sale of business assets.
The earlier you get your savings into super, the better the compounding effect of the investment earnings.
Once the money is in super, any amounts earned by the fund on its investments, including taxable capital gains are taxed at a flat rate of 15% in accumulation phase and in retirement phase are tax exempt. This can only help to increase the amount you are accumulating towards your retirement.
When it becomes time to pay a lump sum or pension from the fund there are tax benefits if you are under 60 and once you’ve reached 60, all super, with very few exceptions, is tax free. It’s probably a good idea to leave your retirement savings in super for as long as possible because of the available tax concessions. If you really need to draw on your super after your preservation age, currently 57, you may be able to draw down a transition to retirement pension to help top up your income.
Saving in your own name or jointly with your spouse may be worthwhile but may not provide the same types of tax incentives like super. The main advantage of personal savings is that you can accumulate your savings and draw them down as you like. However, don’t forget that any interest and dividends or other income on any amounts you invest may be taxable.
Another source of retirement income is the age pension which provides a modest amount to live on.
However, to qualify you will need to meet the income and assets means tests.
Whatever you have in mind for ‘retirement’ think about how you will take advantage of the savings opportunities that present themselves to you as early as possible. This may include superannuation, personal savings or qualifying for the age pension. Then you need to think about whether you will transition into retirement by reducing the amount of paid work and taking on other activities.
If you don’t have enough now and plan to retire in a few years how are you going to afford it?
Executive Manager, SMSF Technical and Private Wealth, SuperConcepts Sydney, Australia
Graeme is a well-known figure in the SMSF community with a long-standing reputation as an accomplished SMSF educator, technical expert and advocate for the sector. Graeme has held senior roles in the Australian Tax Office and as an Assistant Commissioner of the Insurance and Superannuation Commission. Most recently, Graeme was Director, Technical and Professional Standards at the SMSF Association.
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