Planning to retire after 30 June?
Here’s what you need to know now
Moving from full time work to retirement is a huge step. There are many aspects to think about and many important decisions to make. Some are financial, many are emotional and others will relate to your personal goals, your family situation, your idea of what a fun retirement looks like.
Our role is not to lecture on the ‘ideal’ retirement. There are so many ways to live a fulfilling later life.
We can, however, help with the basic questions you need to resolve to get your financial planning underway.
There are five main things to consider when planning to retire:
- Will you be eligible for an Age Pension, now or later?
- Do you need to manage leave entitlements and tax implications?
- If potentially self-funded, are you up to speed on super strategies?
- Are you comfortable with your likely retirement income?
- Will your money last as long as you hope to?
Age Pension – in or out?
Whilst Age Pension applications can seem complex, checking your likely eligibility is much simpler. Retirement Essentials Age Pension Eligibility Calculator automatically considers your key information, including age, residency, savings and deemed income. It then shares your likely eligibility for a full or part Age Pension. Or, if you will miss out, whether you are likely to qualify for a Commonwealth Seniors Health Card.
Leave and tax
If you are likely to get an Age Pension, the next question is how to manage any leave entitlements you have. This can be complicated as leave might be received as staggered salary payments or in a lump sum. Whether this happens before or after 30 June can matter. We asked our very savvy adviser, Megan Marshall, to share her recent experience with Joe and Susan. Here’s how they maximised Joe’s leave entitlements.
Joe’s approaching retirement and has an accumulated leave balance of $25,000. He’d heard from a colleague that he would be hit with a huge tax bill if he took it as a lump sum and that it’s always best to take it as continued pay. Joe also wanted to know:
- When can he apply for Age Pension benefits?
- Does it make any difference when he retires? And
- How does he manage his accumulated leave?
He is now 68 and currently earning $75,000 per annum. He would like to retire immediately but doesn’t want to face high taxes as a consequence. He also wants to apply for Age Pension benefits as soon as he can. His partner, Susan, is 64 and earning $37,000 per annum, but isn’t planning to retire until she is reaches Age Pension age of 67.
If Joe takes his leave as a lump sum before 30 June, while this might make him eligible for a part-Age Pension benefit straight away, all of that income will be added to the income he has already earned in this financial year. This is likely to mean additional income tax.
Alternatively, he could receive his accumulated leave over the next four months, paid fortnightly and formally retire at the end of his leave period. This means that the leave will be split over two financial years, potentially reducing his income tax liability. However, he would not be able to apply for Age Pension benefits until his leave payments have finished, as this will push Joe and Susan over the income limit.
What if Joe reduced his hours to part-time until 1 July, then took his leave as a lump sum?
- If Joe’s part time income (in conjunction with Susan’s salary) is under the income test threshold of $3,568 per fortnight, then he could apply for Age Pension benefits straight away.
- The lump sum leave would be taxed in a different income tax year, when his employment income has ceased (2023-2024)
- When his employment income ceases, he can notify Centrelink and start receiving a higher rate of Age Pension benefit, as only Susan’s income will count toward the income test.
Joe needs to consider whether his employer will allow him to work part-time or not. If this isn’t an option, he can consider taking his leave at half pay until 30 June, receiving the balance of leave as a lump sum from 1 July onwards.
Of course there are always trade-offs. These include employer super contributions, leave accumulation, and sick benefits. But there are also upsides, including the possibility of applying for a Commonwealth Seniors Health Card in the interim.
Every situation is different, so it’s important to be clear on all the rules before you leave full time work. If you, too, are approaching retirement and would like the chance to discuss your options and learn ways to maximise your potential Age Pension benefits earlier rather than later, then a consultation like Joe and Susan’s could be timely.
Strategies for superannuation
For those who are likely to miss out on an Age Pension, or at least a full Pension, there are many useful superannuation strategies which can be employed to ensure you maximise the income from your savings.
Of course there are many different rules as well. It is not possible to cover them in depth in a single article, but it’s worth being reminded of some of the ways you can access and use your super and other savings across the course of your retirement.
Most people do not access their super until they reach their Preservation Age (which can vary depending upon when you were born). Some who wish to keep working may use a Transition-to-Retirement (TTR) strategy, again depending upon age.
However you plan to access your super, you will be moving from the accumulation phase to one of decumulation. There are two major points to make here.
Firstly there are a myriad of strategies attached to super during accumulation and accumulation. Some superannuants even choose to move their money from decumulation back to accumulation. Some strategies are short term, such as top-up contributions, others can be employed across the years.
The second point is that most superannuation rules are restricted by deadlines, many of which fall within the current financial year, or across a longer financial year period.
If you are leaving work this year or next, It’s really important to understand what you can and can’t do within designated 12 month periods. This includes reviewing options such as:
- Contributions, including salary sacrifice
- Contribution caps
- Transfer Balance Caps
- Younger Partner Centrelink rules
- Downsizer rules
- Bring Forward and Carry Forward rules
- And other rules specific to your situation.
Not all of the above strategies will apply to all retirees, but it is crucial to thoroughly understand the detail and the deadlines if they are relevant in your case. If you need extra support to more fully understand your options, a tailored consultation to help you make your super work for you makes a lot of sense.
Are you happy with your projected income?
Will your money last as long as you plan to?
Working through your possible Age Pension eligibility or super strategies should have given you an idea of your likely income in retirement. If you are still unsure as to what your income will be at the point of retiring, and then further along the track, then it will help to have an accurate forecast. Some people find this question very challenging, and it’s easy to understand why. With 80% of Australians likely to receive at least a part-Age Pension by the time they are in their 80s, it is important to explore whether this is likely in your own situation. You will then need to calculate how your super and other savings will combine to create a ‘wage’ in retirement, applying deeming rates as needed. And then factor in inflation to adjust this projected income.
Whilst this process may be straightforward, the calculations are complex. This is the reason Retirement Essentials created the Retirement Forecaster, so our members can input their information, guided by an adviser, and then ‘play’ with the dials to create different retirement income scenarios, depending upon when they retire, how much they think they will spend, and how long they are likely to live. It’s a powerful tool that offers varying insights to aid your decision-making – and to better understand how long your savings will last.
If you are planning on leaving work soon, this short consultation will provide the necessary information to support your decision making.
What about you?
Where are you at in your retirement journey?
Are you hoping to make the break from work soon?
Or are you already enjoying more me-time?
Is there any advice would you offer to your pre-retiree self if you had your time over?