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SUMMARY: Six steps to making sure your run up to retirement is as profitable as possible.
There is a fuzzy point in your life when the retirement you have been working towards suddenly starts charging at you.
It’s fuzzy because it’s going to be a different age for everyone. For most, it will happen somewhere in your 50s. But it could happen from your late 40s, or might not materialise until you’re into your 60s.
From around age 50, you start to care about your super, which miraculously flowered into a reasonable wad of money a few years back.
If you had kids late, like I did, your 50s might still be predominantly about paying private school fees.
But when it hits you, you’ve got to act. Here are six things to do when that light dawns on you.
- Ramp up super contributions
Little will have a better impact on your retirement than having more money in super.
If the kids are off your hands and your mortgage is relatively minimal or gone, maximising your super contributions is a near necessity while you’re still working.
Super contributions are taxed at a maximum of 15%, while you’re under the concessional contributions limits. For those over 50, the limit is $35,000 a year. For most, that is a saving on the 34.5%, 39% or 49% they are paying as their marginal tax rates.
The tax saving gets to stay in super, earning more (most of the time) and being taxed less on those earnings.
- Look at your investment assets
What are your super and non-super funds invested in? Do you have the right amount invested in the growth assets of shares and property?
Classical investment theory suggests you should subtract your age from 100 and have that percentage invested in shares and property (e.g. if you’re 55, then 45% should be in growth assets).
But life expectancies are growing each year. Men are now expected to hit about 80 and women nearly 84. Arguably, this theory needs revision. Perhaps we should be subtracting our age from 110 or even 120. Certainly most 60-year-old SMSF members would have more than 40% of their assets in shares and property and wouldn’t be told otherwise.
Look at your assets. Call your super fund and ask them for a breakdown. Should you be more aggressively invested?
- Stay in the workforce
Not only does staying in the workforce, at least part-time, keep you active, in touch with friends and colleagues, but will also help continue to build your super balance. From a health perspective, continuing to do some regular work has enormous benefits.
Retirement shouldn’t be going from 100 to 0 in a work sense. Too many people feel a great loss of identity when they leave work. If you want to keep working, do that. Ease yourself out. Many employers want to keep you around to pass on your knowledge to the young turks.
And there are more benefits, for those who can make the most of what’s next.
- Transition to retirement (TTR) if you’re over 60
If you’re over 60 and still working, and you’re not on a transition-to-retirement pension, then it’s almost certain that you are paying more tax than you should.
TTR pensions were designed to allow Australians to move slowly into retirement. Cut down by a day or two a week, but receive a super pension to supplement your lost income.
But it’s become way more important than that. It’s now a financial must for those looking to maximise their superannuation and minimise their tax in the runup to retirement, particularly for the over 60s, for whom it works best.
The super pension that you receive via a TTR when you’re 60 or older is tax-free income. However, you can still contribute to super up to age 65 (the restrictions start after 65). So, it’s a tax-free income from your super and then super contributions where you only pay tax at 15% (up to the concessional contribution limit, which includes your Superannuation Guarantee payments).
As an added bonus, your pension fund also stops paying tax.
- Pay down the mortgage? Or pay into super?
I covered this topic in this column on 1/10/14. But the basics are that with mortgage rates at 5%, it can often be worth salary sacrificing the money into super until you can access it tax free, then paying down the mortgage.
Depending on your situation, it can add tens of thousands of dollars to your super lump sum. See an adviser, as the maths are tricky, depending on your income and super balance.
- Start planning for your age pension
Many won’t have enough assets as to lose access to the government age pension when they turn 65. That doesn’t mean that they shouldn’t try to make the most of these strategies.
However, you can also do a little planning for the government age pension. When close to pension age, you should learn about the value of the home and how it is counted towards the financial limits, whether assets would be better sold before or after retirement and knowing the gifting rules – sometimes it might be worth giving some to the kids outside of timeframes when gifting can catch you out.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au