Financial advice for retirement

Superannuation is an ideal investment for retirement, and there are some easy ways to build super that can make a substantial difference to your final nest egg before you officially transition to retirement.

Adding to your super today means enjoying a better lifestyle in retirement, and there are opportunities to grow your super that can provide immediate benefits including valuable tax savings.

Planning and transitioning for retirement

Transitioning to retirement should be an exciting time to look forward to.

With the nine to five grind behind you, it’s a chance to catch up with friends, head off on that holiday (or holidays) you always wanted, try your hand at new hobbies, or just enjoy being able to give the kids a financial helping hand in their lives.

How to start your transition to retirement

If you've held more than one job or changed your name or address, you could have some forgotten super savings. It’s important to reunite with any lost super as this money belongs to you. The Tax Office has an online Super Seeker that lets you track down any lost super or your financial adviser can check if there’s unclaimed super in your name.

If you have several super funds it may be worth combining, or ‘rolling’, multiple balances into a single fund. You can save on fund fees and it’s far easier to keep track of a single fund over time.

Before combining your super funds, make sure you are familiar with the insurance policies within each of your existing funds so you don’t cancel a valuable policy. This is something your adviser can help with.

One way to grow your super savings is by ‘salary sacrifice’. This involves having part of your before-tax wage or salary paid into your super rather than receiving the money as cash in hand.

These contributions are usually taxed at a lower rate than your personal tax rate, making salary sacrifice a tax-friendly way to save for retirement, but contribution limits do apply.

You can also contribute to super using after-tax money from your own pocket. The appeal here is that no contributions tax applies – a saving of 15%, although contribution limits do apply. Think about using windfalls like an annual tax refund to grow your super.

Annual limits apply to the amount you can contribute to super – exceeding these limits can mean paying extra tax, so it pays to keep track of how much is going into your fund each year.

These limits are subject to change and are designed to encourage you to save for retirement throughout your working life, so the earlier you start contributing, the more you will be able to grow your super.

There are limits in place for both before tax contributions such as compulsory employer contributions and salary sacrifice (known as Concessional Contributions) and personal after-tax contributions (known as Non-Concessional contributions).

Financial investments held outside of super can also be a source of retirement income. The downside is that independently held assets - like shares, a rental property or cash savings, don’t usually offer the same generous tax breaks as super.

Transition to retirement pension

Your superannuation offers opportunities to wind down from work when you choose, without winding back your income.

By the time we reach our 50s, many Australians would like to shift down a gear, reducing our working hours in the lead up to full time retirement. However this can also mean a reduction in personal income.

The solution to enjoying a lighter working week without a drop in pay, can be a transition to retirement (TTR) pension. This is where a FinChoice retirement financial adviser can help.

Transitioning to retirement pension FAQ

A TTR pension is available once we reach what’s known as ‘preservation age’- between 55 and 60 depending on your birth date. Using a TTR pension it’s possible to withdraw up to 10% of your super balance each year to provide extra money to live on.

A TTR pension can also be used in conjunction with salary sacrifice to give your nest egg a valuable boost.

Super contributions made through salary sacrifice are lightly taxed at 15% - probably less than your personal tax rate. The tax savings make it possible to receive the same after-tax income, possibly more, while also growing your super.

To see how effective this TTR pension strategy can be, let’s say Jim1 (age 60) earns $80,000 and has $250,000 in super.

Jim arranges to salary sacrifice $27,600 into super each year. Along with his employer’s compulsory contribution this brings his pre-tax contributions to $35,000 annually – the maximum Jim can contribute this way each year.

To make up the income shortfall, Jim commences a TTR pension, receiving an income stream from his super worth $9,800 annually.

In addition to growing his nest egg, Jim’s annual income tax falls from $18,747 to $9,149 - a saving of $9,598. Even after allowing for tax on his super contributions, Jim enjoys total tax savings of $5,458.

Retirement reality check

Giving your savings a retirement reality check – at least annually, will let you know if you’re on track to fund the sort of retirement you hope to lead. It’s easier to fine tune a savings plan at an early stage rather than waiting until you’re about to retire to take action.