Make sure you read this first
The end of one financial year or the beginning of another is a very popular time to step back from full-time work. Of course some people are ‘age’ driven and respond to a very specific birthdate trigger such as Preservation Age (usually 60) or Age Pension entitlement age (67). But many others will leave work as the result of different triggers – frequently related to their employer’s needs. And these can often coincide with a new financial year.
Retirement takes a lot of forward planning, so this article is in no way an endorsement of pulling it all together in the next six weeks. This is because such a compressed timeline reduces the opportunity for essential research and evaluation of your options. But, if you do wish to retire on June 30, or thereabouts, here’s a 6-point priority plan to support your decision-making.
- I’m ready to retire, so what comes next?
That’s a big question, but not insurmountable. Your first step is to become more familiar with your current situation, both financial and aspirational. Understanding what type of life you would like to lead after work is important, particularly the balance of activities, leisure, and how you will maintain a sense of purpose. If every day feels like a Saturday, retirement can quickly lose its appeal. A better understanding of your retirement lifestyle will also enable you to gauge your required income for week-to-week expenses as well as any big ticket items on your wishlist. These wants and needs can then be ‘translated’ mathematically into recurring income needs, entitlement possibilities, tax implications and potential income streams. Which leads us to step two…
- How to forecast your future needs and entitlements
How long are you likely to live? No one knows, but increasingly accurate projections (try the Retirement Essentials longevity calculator here) can now help you use an anticipated lifespan to see how long your own savings will be there to add to any Age Pension entitlement. You can use this in addition to the free Retirement Essentials Age Pension Eligibility Calculator to more accurately forecast how much Age Pension you are likely to receive when you retire. If you do qualify for a pension entitlement, you will also automatically receive the valuable Pension Concession Card (PCC). The information you have now obtained feeds directly into the next question, which is how any Age Pension entitlement can combine with other savings, particularly super, to form a sustainable income stream.
- How do I understand the way super combines with Age Pension payments?
Little wonder that this question is one of the most frequent Retirement Essentials advisers are asked. It’s mainly because there are so many rules around the income and assets tests which are confusing but also offer an opportunity to maximise Age Pension benefits. Again, using the specifically designed Retirement Forecasting Tool enables retirees to see at which age they will be eligible for the Age Pension and to what extent. The tool then ‘layers’ the use of super and other savings to form a secondary income stream. In many cases retirees will start life after work with a high dependence on super income and lower Age Pension payments. But as their super is spent down, the Age Pension component will increase – and become the main ‘engine’ over the long haul.
- Are there opportunities to boost my Age Pension?
Yes, there usually are. Some of the aspects of Age Pension entitlement that are often overlooked are how Centrelink views assets – and how it expects you to declare them. Many applicants can miss out on an Age Pension, even though they are eligible, because they declare their super as both an asset and as an income stream. Centrelink only requires you to declare the savings as a financial asset – it will deem how much you receive as an income stream. Separately, many couples will expect that their joint super savings are treated equally. This is not the case if one of the couple has their super still in accumulation mode. Instead, this person’s savings are exempt from the means test, which often makes the difference between entitlement or not for the older partner. You can read more about this ‘younger spouse’ rule here.
- How to move from super to an income stream
At retirement, the question of accessing superannuation is normally front of mind. Super can seem a relatively simple concept while you are in the ‘saving’ (accumulation) mode, but when you can finally access this money at age 60 (provided you are also retiring) the whole discussion can seem very complicated. This is when knowing the requirements to access your funds is important. But more important still is knowing how you wish to tap into these savings. Is a lump sum right for you? Is using super to pay down a mortgage important? Maybe a combination of both appeals. There are lots of rules attached to the decisions you make when you do withdraw super, including, if using an Account-Based Pension (ABP), minimum annual amounts. There are also significant tax upsides. Again, modelling can be very useful to project how your super will last across your retirement journey, with annual returns factored in. This is important because, let’s say you are aged 65 and on the minimum annual withdrawal of 5% until you are 74. Current super fund returns remain robust, despite the international market turmoil. So your super is likely to post returns well in excess of the minimum withdrawal percentage and your total balance will remain stable.
- How do I make the right investment choices so my money lasts?
This will require an understanding of your emotional attitudes about money. In short, it means gaining greater clarity on your risk profile. Only when you are clear about your risk tolerance can you explore whether your current investment choices do two things; match your profile AND will ensure returns that suit your future needs across the many years of retirement. Read more about managing risk here.
But wait, there’s more:
June 30 or July 1?
Depending upon when you choose to leave full-time work, you may be able to minimise your tax. The treatment of leave entitlements, bonuses and matters connected with company ownership can all potentially affect entitlements and/or create higher tax bills. Many of these implications can vary overnight from June 30 to July 1 as they relate to specific financial years. It’s important to know how this will work before you empty the desk, hand in your lanyard and head out the door.
This brief summary of considerations for those who are intending to leave work soon cannot possibly cover all the options at your disposal to plan and enter the ideal retirement.
