A time of transition: retirement planning

Using the transition to retirement rules, people over age 55 approaching retirement can ease themselves into a new routine, retain flexibility regarding their income, and give their retirement savings a boost.

Making up a shortfall

Take 60 year old Jim. He earns $50,000 a year before tax, which gives him an after-tax income of $41,450. He has $200,000 in his superannuation fund. Jim no longer wants to work full time, and has the option of easing back to three days a week. However, with living expenses of $38,000 a year, Jim doesn’t think he can afford to reduce his hours.
Or can he?

The building for retirement rules allow people over age 55 to start drawing pensions from their superannuation funds. This provides Jim with a means by which he can easily make up the shortfall in income.

Jim cuts back to 3 days a week and commences a pension from his accumulated superannuation. As he is over 60, his pension payments will be completely tax-free.

Jim’s employment income, after tax, drops to $27,300, so to meet his living expenses; he draws a pension of $10,700 from his super fund. Even though he is drawing a pension, his employer will still be making compulsory superannuation contributions to Jim’s fund.

Boosting savings

The building for retirement rules can also be used to boost retirement savings without reducing working hours.

Mary is 60, earns $70,000 a year ($54,100 after tax), and loves her job. She wants to keep working as long as she is able, but is worried she won’t have enough saved for when she does eventually retire. Currently, she has $250,000 in her superannuation account. Her living expenses are $45,000 a year, so after tax, she could contribute her savings of $9,100 a year to superannuation as a non-concessional contribution.

Using a standard salary sacrifice arrangement, Mary could drop her salary to $58,000, and contribute an additional $12,000 a year, pre-tax, to super. After the superannuation fund pays 15% tax on this, her net additional savings to super have increased to $10,200 a year, or $1,100 more than her starting position.

This strategy provides Mary with another option. She could drop her salary to just $30,000 a year, and contribute $40,000, pre-tax, to superannuation. This arrangement can continue until 30 June 2012, after which she will need to decrease the amount of her pre-tax contribution into superannuation. To make up the shortfall on her living expenses, she could draw a pension of $17,700 from her super fund. The end result, after taking into account contributions tax and pension payments, is that she will save an extra $16,300 a year towards her retirement. Her personal income tax after taking into account contributions tax on the $40,000 pre-tax contribution has decreased by $7,200 as a result of this strategy. The end result is that the saving from the tax bill of $7,200 is redirected to Mary’s retirement savings each year compared to her starting position where Mary was contributing $9,100 as an after-tax contribution.

Advice required

It’s necessary to obtain expert advice to make sure your strategy meets both your short and long-term needs and takes into account ever changing legislation. Talk to one of our financial advisers about how you can benefit.