Age 50
It’s a significant birthday but also culminates in a time where your earnings capacity is usually at it’s highest and your expenses are reducing in that your children have flown the coup (or are not far from doing so) and your mortgage is paid out or under control. Getting your ducks in a row from age 50 also gives you more time (eg. 15 years if retiring at age 65) when compared to leaving it later.
Age 50 Action Steps:
- Budget – go through every item of your budget and eliminate expenses that you can do without. If you can’t eliminate the expenses, then try to reduce it.
- Salary sacrifice to super – For every $100 in after-tax income that you sacrifice each week, it will generally add an additional $150,000 to your superannuation over a 15 years*.
Your superannuation Preservation age (ages 55 – 60) Depending on your date of birth reaching your preservation age (just google ‘preservation ages’) allows a significant benefit in that you can start a transition to retirement strategy (TTR). One of the main benefits of a TTR strategy is that it allows you to move part of your superannuation balance from a 15% tax on earnings environment to a 0% tax on earnings environment. For example, if your superannuation fund has a balance of $300,000 and the fund earnings (eg. Your money making money) are 7% ($21,000), then ordinarily you would pay tax of 15% (-$3,150). If however, you had moved your $300,000 into a Transition to retirement strategy, earning the same return of 7% , then the tax that you pay is $0. This tax savings compounds each year as your balance grows.Preservation age action steps:
- Transition to Retirement (TTR) – Find out more about the benefits of this strategy. Please note that it is complicated and if done incorrectly can actually result in your being worse off.
- Set Goals – with approximately 10 years of working life remaining, it pays to set goals. Two main things that you should work out now are: 1)at what age would I like to retire? 2)how much income would I need to do the things that I want to do if I were retired right now.
Age 60By this time in life most people’s children are well and truly completely non-financially dependent and your mortgage is paid off. Earnings capacity is generally still good. If you haven’t started a TTR strategy already, right now is a good time to do so because any income drawn from a TTR super fund is tax free. One of the functions of a TTR strategy is that you can draw an income of between 4% – 10% (eg. $12,000 – $30,000 if your balance is $300,000) of the account balance even whilst you are still working. “Why would I want to draw an income from my super fund when I’m trying to build it up?” You ask. Well, you can use this to your advantage by increasing your salary sacrifice contributions to super. It’s get’s a little detailed here but follow me. If your top marginal tax rate is 37%, this means that $10,000 of income is taxed at -$3,700 leaving you with only $6,300 to spend. If you were to salary sacrifice this $10,000 to super, rather than taking it as taxable income, then the tax rate is reduced to 15% (-$1,500) with +$8,500 being contributed to your super fund. You can then draw a tax free income of -$6,300 from your TTR super fund. The net benefit is +$2,200 that builds up in your super fund (+$8,500 added minus -$6,300 income drawn = +$2,200)Age 60 action steps:
- Budget – Refine your budget again as you have 5 years or less of earnings capacity and need to ramp things up. If you can’t eliminate the expenses, then try to reduce it.
- Refine your TTR strategy – try to increase your salary sacrifice to super and only draw the minimum 4% tax free income from your TTR.
Retirement Age? The glass is half-full! Two generations ago, Australian’s retired at age 65 and were gone by age 67. Today, medical technology means that the average time spent in retirement is closer to 25 years. Not only that, the notion of going from full time work to nothing at retirement is less black and white and is now ‘grey’ (no pun intended) in that work is generally more flexible allowing some Australian’s to work part time or contract work (from say age 62-65). With this added longevity does come the challenge to make your retirement savings last much longer.Retirement action steps:
- Budget – Budgeting in retirement is all about priorities. Very few people have enough to do everything. Write down your top 2 discretionary expenses is order of priority. For example, if travel is no. 1 and you would like to spend $10,000 on travel each year, then go through your budget and try to eliminate $10,000 of expenses. Remember that you are now drawing 100% of your expenses from your retirement savings as you are no longer working, so it pays to be brutal with discretionary expenses that are not in your top 2 priorities.
- Structuring – If you have structured things correctly, you may never pay tax again on income drawn from your retirement savings.
Aged Pension age (ages 65 – 67)Depending on your date of birth, you will reach aged pension age between 65 – 67. Any income received from the aged pension is useful in that it means that it allows you to reduce the income you are drawing from your retirement savings. Even if you don’t qualify for any aged pension because your assets are too high, you are likely to qualify for the Commonwealth Seniors Health Card providing discounts on PBS prescription medications and other discounts that are well worth applying for.Aged Pension age action steps:
- Find out what age you qualify for the aged pension and make an appointment with Centrelink to see what your entitlements are. The Commonwealth Seniors Health Card is not assets tested so the majority of people will qualify for this.
The strategies highlighted are detailed and complicated in nature. Please ensure that you research thoroughly and/or seek professional advice. (General Advice Warning) The information provided here is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions.* The example used where every $100 per week in after tax income adds over $150,000 to your superannuation fund is based on the following assumptions: marginal tax rate of 37%, superannuation fund net returns 7% pa.Written by Michael Hogue.
