Let’s Talk Retirement
Let’s face it, the majority of the population spends their working life, building wealth and looking forward to that day, sometime in the future, where they can pull up stumps and enjoy the fruits of their labour. A few tweaks here and there can add great value to not only your bottom line, but also your peace of mind from the beginning, which in my experience is the most nerve racking for retiree’s.
A lot of emphasis is given to how you build wealth throughout employment, be it salary sacrifice, shares, property, simply just wanting to be debt free or a combination of all, however, not enough is spoken about the actual mechanics of retirement and how to make the most of the act of retiring during that final year.
Below are just a few things that you should think about leading up to that final year of work, however as always it is good to get another set of eyes over your situation to really optimize the start of the next stage of your lives.
The Timing of Retirement
By this I mean time of year as well as age, but it will be different for everyone and may even depend on your employer. A few things to be aware of are any potential pay rises coming up which might affect a final payout and also your accumulated leave balances that may be paid out upon retirement. If these are large, it can mean quite a considerable amount of tax payable depending on what you have already earnt in that financial year. Secondly, is how close you are to receiving the age pension and possibly that of your spouse, if applicable. There may be occasions when one partner is working who affects the age pension of their spouse and this is made more relevant if there is an age gap. Finally, your ability to access your super, which is dependent on your preservation age and retirement status. This may be under age 60 for a small portion of people currently retiring, over age 60 if you have left a place of employment or age 65. There are other ‘conditions of release’, but we won’t get into them here.
As I suggested, a lot is spoken about maximising super throughout your working life but using both the concessional and non-concessional caps at retirement can also be very effective if used properly. Furthermore, in recent years the government has changed the rules to help those with lower balances get more into super and save quite a bit of tax at the same time. Rules such as the ‘carry forward’ provision of concessional contributions or the ‘bring forward’ provision of the non-concessional cap can be used quite effectively but will depend on each individual’s situation. These are only just a few and most common, however, they can be tricky to calculate. Nonetheless, it can make a great deal of difference to the longevity of your retirement savings. This could be relevant to those who have just sold a property, either their own home or an investment property and want to contribute to super or even those who have saved a great deal outside of super and want to contribute it in the most effective way using the various rules.
Accumulation vs Account Based Pension
During your working life the most common Superannuation accounts are what’s called, accumulation funds. That is, all your employer super guarantee and salary sacrifice etc, gets contributed into this account. This then gets invested as per your choice or default selection and grows over time. A contributions tax at a rate of 15%, is taken from your concessional contributions and any earnings the funds make, are also taxed at 15%. You can not take a regular income from this account and can’t access it at all until you have met a condition of release.
At retirement, it is most common to transfer all or most (you may leave some to keep insurance or if you may work in the future) of your accumulation account into an account called an Account Based Pension. This may or may not be with the same provider, however the point of this account is to pay you a regular pension (fortnightly, monthly, quarterly, yearly, etc) to satisfy your cost of living, whatever that may be. This account will generally continue to do so until all of your funds are exhausted (hopefully not too soon). The beauty of this type of account is in most cases, the pension paid to you is tax free and the earnings that is made within the account is also tax free (not taxed at 15% like the accumulation account). However, there are limits on how much can be placed in this account which is referred to as the transfer balance cap. Now depending on if you already have an account-based pension or not, this cap again, may be different to everyone. There is a good suite of retirement calculators on the government’s money smart website for your perusal also, https://moneysmart.gov.au/retirement-income/retirement-planner.
How You’re Invested
Potentially the most important part of the whole process is knowing and being comfortable with how you are invested. A lot of super funds these days can automatically change your option depending on your life stage, however, how you are invested is very important to not only the longevity of your funds, but how comfortable you feel in retirement in times of market downturns. Probably the worst outcome for a retiree would be a market downturn at the very beginning of your retirement, as you start to draw down on your super. This can be hard to recoup and can almost be seen as starting retirement with a lower balance. There are ways of minimizing these effects, but it also may come down to prudent spending in these times. In terms of being comfortable overall with the risk you are taking, you need to expect market downturns throughout your retirement and have a plan for when this occurs. You may get the urge to decrease your risk or seek the safety of cash, however if you have a plan, are comfortable with how you are invested initially and know what the outcomes will be, you will be more equipped when the inevitability of a market correction occurs.
It is important to know your own situation and finances thoroughly to get the most out of your retirement, not only now, but throughout the years that follow.
Retirement is certainly not one size fits all and what we have just spoken about only really scratches the surface of what to consider when retirement is approaching. As always, a financial planner can guide you through these times and do the lions share of the heavy lifting as it is meant to be a time to rejoice and look back at what you’ve created, not a time of stress and anxiety. For a bit of guidance on how much you may need or want in retirement, please check out the Association of Superannuation Funds of Australia’s website at https://www.superannuation.asn.au/resources/retirement-standard.
General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Where a specific product has been mentioned, you should always consult the PDS before making any investment decision relating to it.