RUNNING OUT OF TIME?
RUNNING OUT OF TIME?
Smart ways to make the best of your super
If you have worked hard to build a nest egg to enjoy later in life, it is not enough to just let superannuation take care of your future.
There are things you need you need to consider, to ensure you get the best out of your retirement.
Leading up to retirement
The last few years of work are a crucial time to build up your super fund (that still may be feeling the effects of raising children, repaying your mortgage and life’s general unexpected surprises).
There are some simple & brilliant strategies to support you.
Salary Sacrifice
This is where you elect to have your employer pay more of your pay into your super fund, in addition to the superannuation guarantee that is legislated.
If your marginal tax rate is 19% (earning more then $18,201) or more, salary sacrificing can be an effective option, given the 15% tax paid on employer super contributions.
For those on the top marginal tax rate, the benefit can be as much as 32%.
Salary sacrifice could be smarter than paying down your home loan, given the current economic conditions, with lower tax, lower interest rates and the average super returns, where you could be better off going into super, rather than into a mortgage offset account.
Remember the maximum you can contribute to super using this strategy is $25,000 (which includes your superannuation guarantee). However, it can be more complex with this, with varying employment contracts, and varying personal situations.
Transitioning to retirement
There is an arrangement called transition to retirement that you can use when you reach preservation age and you are entitled to access your super.
It allows you to take a concessionally taxed income stream from your super fund, whilst you are still working.
You can then recycle the extra cash back into your own super fund
as part of a salary sacrifice arrangement (discussed above), or
for estate planning reasons, in looking to reduce potential death benefit tax for your adult children or
to your partners super account where their balance is significantly below yours, benefiting from potential tax offsets, or start planning to maximise your Age Pension from the government (discussed more below)
Celebrating the age gap
For those who are lucky enough to have a much younger partner, there could be an advantage in retirement. When the older partner retires & applies for the Age Pension (government entitlement/social security), the super fund balance of the younger partner still working is not included in the assets test.
That means they might get a pension, or more of a pension than would be the case until the younger party reaches pension age.
How much should you take out of super?
Once you retire & move your super benefits from “accumulation” to an income stream or “pension phase” the government has legislated that you withdraw a minimum of 4% of your account balance each year. This increases with your age.
The entire premise of the government mandated minimum withdrawals is that they do not want Australian’s sitting on millions of dollars in a TAX FREE environment. The government wants Australians spending this money in their retirement and pumping it back through the economy.
However, from an individuals perspective, you want to retain as much money as possible in this tax free environment, as it will increase your capital longevity, provide you with financial security & freedom, in addition to not having to beg the government for the Age Pension (which is approximately $36,000 p.a. for a couple). Remember to be conservative as retirement can last 30-35 years these days.
Your financial advisor can support you in determining the right mix for your specific circumstances.
Pay out the mortgage?
In a time of low mortgage rates, where recent super fund returns have been double digits, it could look attractive to keep your mortgage in retirement rather than pay it out when you get access to your super.
However, past performance is not always an indicator of future performance. In addition, the psychological impact of being debt free is quite empowering.
Furthermore, we recommend you seek professional advice from your financial advisor, as we see far too often, Australians getting access to their superannuation, applying their past experiences or what friends/family have said about superannuation and pulling all of their benefits out of super, to repay the mortgage and have a few hundred thousand sit in their bank account.
Over the next several years they spend this money, before needing to downsize their home. They don’t want to move out of their neighbourhood, but given their financial situation, they need to move 45-60 mins away from family and friends.
Furthermore, once they have downsized, the proceeds will sit in their bank account earning 1.8% (or sometimes less), where they may start paying tax in some cases or ultimately diminishes before having to rely on the government to support them.
Ask an expert
There is a lot to think about as you start to think about retirement. Once you stop work you will have to choose the allocation you want for your super, whether you want to take a lump sum or if you want to draw down an income stream.
A retirement plan for a couple may cost between $4,000 to $7,000. As illustrated, there are a plethora of options & strategies to consider, which can become complex & sometimes overwhelming.
Most super funds will allow you to pay financial advice fees from your fund. However, some industry super funds still do not allow for their “members” to pay for financial advice via their super fund.
Good advice will make retirement much more enjoyable.
Original Article: The New Daily - Rod Myer