Evaluate how much super you may need in retirement to live well, and estimate how…
Thinking about your transition to retirement? If you have reached your preservation age and still working, chances are you may have found yourself wondering what the next step for you should be, considering your long-term financial goals. While you may not be ready to retire yet, needing to work to pay for the rest of your life doesn’t seem too appealing either. A strategy may be required to put your mind at ease for the years to come.
What Is A Transition To Retirement Strategy?
Essentially, a transition to retirement (TTR) pension is one that enables you to supplement your income by permitting you to access some of your super once you’ve reached your preservation age. The main outcome of the TTR strategy is to use income from it to replace the employment income.
When you reach your preservation age you will be able to access your super, as long as you are retired or have commenced a transition to retirement income stream. If you happen to be born before 1 July 1960 you will already be at your preservation age of 55 years. If you were born after 1 July 1960 your preservation age depends on when you were born.
Preservation age based on date of birth
How Does A Transition To Retirement Strategy Work?
Transition to retirement (TTR) means that you will need to open a retirement income account with some of your superannuation finances. You will still keep your regular super account with some money in there as well as your new account, to allow you to continue to gain your employer contributions and any other voluntary contributions that you make along the way. Having these two accounts will work to minimise your overall tax and boost your superannuation.
You will be able to use your transition to retirement strategy to either supplement your income, should you decide to decrease your work hours, or increase your superannuation while saving on tax while you continue to work full time.
Case Study – Mark Reduces His Hours At Work
Mark has just turned 60 and currently earns $60,000 a year before tax. He makes the decision to reduce his workdays to three days a week, allowing him to ease into retirement gradually. This effectively means that his income will drop to $36,000. Mark then transfers $200,000 of his super to a transition to retirement pension and chooses to withdraw $12,000 each year, tax-free. This will help to subsidise his pay.
Case Study – Sarah Reduces Her Tax
Sarah is 60 and earns $100,000 a year. She wants to remain working full-time for potentially five more years. Sarah moves $200,000 from her super to an account-based pension, so she can begin a Transition to Retirement strategy. She then begins to salary sacrifice into her super, which will reduce her income tax, but also her take-home pay. Because of this, she replenishes her income by drawing up to 10% of her TTR pension balance every year.
Is A Transition To Retirement Strategy Right For Me?
Provided the strategy is well planned out and the right advice is given, a transition to retirement strategy can be smooth and straightforward, meaning a more comfortable lifestyle now or a boost to your super to enjoy later. Some may think that only those with a lot in their super can do well from a transition to retirement strategy. However, the fact is, you can easily open an TTR account, as long as you are within the right age bracket and have more than $25,000 in your super.
If you can salary sacrifice in your current job, you could perhaps move a portion of your salary into your super. You could then supplement your take home pay with funds from your income account to keep the balance with your lifestyle. The tax payable on your salary sacrifice contributions would need to be less than the tax you would otherwise pay on your salary in order to be a beneficial strategy.
If executed effectively, a transition to retirement strategy could contribute to your retirement and save you tax. It could even allow you to work less and give you more flexibility and time. The right advice is essential to ensure that a TTR strategy works for your individual situation. A financial adviser will also be able to tailor the strategy to your specific situation and give you peace of mind in the knowledge that you are taking the necessary steps to a secure and comfortable future.
Call Elliot Watson Financial Planning on 02 4038 1623 to make an appointment to speak to an advisor today.
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