A] Prelude
In this blog we will pay attention to retirement planning ‘Australian style’. Interesting to see how they perceive retirement planning and what can be relevant down under.
The first five years of retirement tend to be the most expensive as people do the things that have been delayed during their working lives, an expert warns. The record numbers of Australians moving into retirement are doing so in a world that is becoming increasingly uncertain at a time when work-life values are changing.
So that means retirement needs increased planning with options for financial security requiring early consideration. “You should try to develop a retirement roadmap at least 10 years before retirement,” says Michael Abrahamsson, director with Wealth.
Which involves looking at your financial and lifestyle situation now and where you would like to move to as you retire.
B] Retirement Roadmap
Firstly, think of a savings target for your Super. The Association of Superannuation Funds of Australia says a comfortable retirement today will demand a (home-owning) couple have $ 690,000 in super or a single $ 595,000. For a modest retirement relying heavily on the age pension it’s more like $ 100,000 for both couples and singles.
C] Creating a retirement plan
This includes the following elements:
- Plan early to increase voluntary super contributions over time;
- Pay down mortgages as a priority as interest rates are now punishingly high;
- With inheritances or investment property sales, plan to contribute to super over time to avoid hitting caps;
- Think of work/retirement options including part-time, volunteering, grandparent duties, travel in early years;
- Plan how to help the kids and when best to do it.
D] Effect of compounded return on investment
The earlier you start the better the retirement outcome. “Making extra contributions earlier gives you the benefit of compounding especially with superannuation because of the concessional tax treatment it enjoys”.
But we all have conflicting financial commitments and needs, so look at the big picture for a moment. There was a time when interest rates were so low and super growing so fast that super balances could outgrow mortgage commitments. But things have changed.
E] Reduce mortgage debt
“Mortgage rates were 2 per cent and how they are 6.5 per cent so there is a strong focus on the need to retire mortgage debt”. So making a concerted effort to reduce your mortgage before retirement will pay dividends later.
The Melbourne Institute Roy Morgan Pulse of the Nation survey recently reported that those without cost-of-living worries are actually saving. “Nearly 90 per cent indicate they could draw on savings or assets to cover an emergency expense,” the report said.
However of those feeling cost pressures “only 35 to 40 per cent … indicated they would draw on savings or assets”.
F] Downsizing for a super boost
If you own an empty nester family home you have a great chance to boost super and reduce any mortgage you may have. That is taking advantage of what is known as a downsizer contribution to super.
It works like this: If you sell a larger family home and move into a smaller property you can make a super contribution of up to $ 600,000 per couple. A distinct advantage is that does not add to your non-concessional super contribution cap over three years which will be $ 360,000 from July.
G] Downsizer superannuation contributions
- Available between age 55 and 75 when selling a family home;
- Must be wholly or partly capital gains tax-free family home owned at least 10 years;
- Sale enables each member of couple to contribute up to $ 300,000 to super for a total of $ 600,000;
- Where one member of a couple owns home both can still contribute $ 300,000 each;
- You cannot contribute more than the value of the home;
- Contributions are considered non-concessional but do not contribute to non-concessional super caps;
- Contributions are counted as part of super transfer balance cap;
- Contributions must be made within 90 days after settlement and only done once;
- So that could help you get to the sort of super balance you require without affecting your lifestyle while you save.
H] Plan for Life
Retirement is not all about money and there has been a marked shift in peoples’ attitudes to work and life in recent years. “People aren’t wanting to work in their job from age 40 to 67 any more,”. As they move towards retirement “it might be consulting or working on contract part-time to add meaning by contributing around young people and being engaged in the community.”
People also want the flexibility to travel, perform grandparent duties and volunteer. So check in with how you want to spend your life as you age and build that around your financial situation. Remember there are flexible tax arrangements which make it attractive to work a little after formal retirement!
I] Helping the kids
The baby boomer generation has been fortunate to be able to buy property when it was relatively cheap, but their children have not been so lucky. But because they often have property and super they can be in a position to help out the next generation.
Think about when and how you go about this.
Once you retire or put your super into pension mode you can take out lump sums to help dependents. But remember to factor in your own needs. If you plan to retire on a part pension, any gift you make above $ 10,000 in one year or $ 30,000 over five years will be considered part of your asset base for five years.
That means it could reduce your pension entitlements but leave you without the benefit of using it yourself. So if you plan to go down that path, timing is important. “If you give at age 60 then it’s not caught in the gifting provisions when you draw the pension from 67.”
You may also want to wait a bit in retirement before making a substantial gift from your super or other assets. “The first five years of retirement tend to be the most expensive as people do the things that have been delayed during their working lives.”
So you could consider giving yourself the experiences you want before helping out family so you don’t feel deprived.