Easing into retirement

Wednesday, 06 August 2014

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More than ever before, Australians are now transitioning gradually into retirement, rather than abruptly ending full-time work. In fact, 48% of full-time workers aged 45 or over are planning to move to part-time work before retiring.¹

 

This can be driven by financial concerns or lifestyle goals, or a combination of the two. Many people like the flexibility of easing into the next phase of life after over 40 years in the workforce. The following case study shows how this can be achieved.

Robin’s goals

Robin is one such person who wants to wind back her working hours gradually. At 59, she’s keen to spend time with her first grandchild, but isn’t quite ready to retire just yet as she’d like to maintain the social interaction and mental stimulation she gets from work. With this in mind, she decides to cut back to three days (24 hours) a week.

She meets with her financial planner to make sure she can maintain her current lifestyle, while structuring her salary in the most tax-effective way possible.

Work part-time without reducing income

After scaling back her working hours, Robin’s salary drops from $100,000 to $60,000. Her adviser suggests setting up a Transition to Retirement Pension (TRP) as the income from this will replace her pay cut of $40,000. This means she can maintain her after-tax income.

A TRP is a special type of income stream available for people aged 55 and over that lets you access your super benefits before you retire3. By implementing a TRP, Robin can now:

  • invest some of her super in the TRP, and
  • use the regular payments from the TRP to replace the income she misses out on when moving to part-time work.

She can also:

  • reduce her hours without reducing her income, and
  • replace her salary with a tax-effective income stream.

It’s important to note that limits apply to the amount of income you can receive each year and you can only make lump sum withdrawals in certain circumstances.

How does it work?

Robin’s TRP will provide her with an income each year, allowing her to maintain her current living standard. There are minimum and maximum income thresholds she needs to consider though, such as only being able to access up to 10% of her account balance each year. For this reason, it’s important to make sure she puts an appropriate amount of super into her TRP.

The good news is Robin will pay less tax on the income payments from her TRP than she does on her salary. 

As a result, she won’t need to draw down her full pay cut from the TRP. In fact, a pre-tax income of $32,157 will cover her salary reduction of $40,000 as she is entitled to a tax offset on taxable TRP payments.

 

  Before strategy After strategy
Pre-tax salary $100,000 $60,000
TRP income N/A $32,157
 Total pre-tax income $100,000

$92,157

Less tax payable including Medicare levy

$26,447 $18,604
 After-tax income

$73,553

$73,553


What’s more, when she turns 60 next year the income stream payments will be completely tax-free², meaning a TRP payment of $25,400 will cover Robin’s $40,000 pay cut.

 Tips and traps 

It can be tempting to focus on the short term and maintain your current lifestyle when you’re working part-time. But be careful you don’t draw down your super too quickly and fall short of income during retirement as a result. Your planner can help you determine your expected length of retirement and the income you’ll need each year, so your super lasts as long as you need it to.

Once you purchase a TRP, you can transfer the money back to super at any time. This flexibility is a great option if you think you might return to full-time work at any point. However, a TRP can still be a smart strategy when you’re working full-time and want to boost your retirement income.

Some super funds have a minimum account balance, so it’s important to check if yours has a limit before you start a TRP. 

A TRP isn’t always the most effective strategy. If you have investments outside super, you may actually be better off keeping your super as it is and using your other assets to supplement your income.

At CommonCents Wealth we help you build your Ideal Financial House to give you all the shelter, comfort & security that you dream of.

1. Australian Bureau of Statistics, 6105.0 – Australian Labour Market Statistics, January 2009.

2. Assumes the income stream is commenced from a taxed super fund. The tax-free treatment only applies to pension payments received after turning age 60.

3. Access is limited to income stream payments. Lump sum withdrawals are generally not available.

Note: this case study is for illustration only. 2012/13 tax rates and thresholds have been used.

About The Author

Nick Girle

Nick Girle

Senior Financial Planner & Director

 

Nick Girle is a leading expert in personal finance who has been providing families with financial advice for 20 years.

He works with the types of families that aspire to use their financial and intellectual resources and are willing to put in the effort to rid themselves of all of their money worries.

Since embarking upon his Financial Planning journey Nick Girle has brought comfort, security and peace of mind to thousands of client’s financial lives through a process that ensures complete understanding of a family’s financial hopes and dreams.

He became involved in the Financial Services industry initially with the Suncorp group before taking on a Senior Planning role with NAB Financial Planning and then established Common Cents Wealth in 2011 to better help him spend more time focussing on what’s important – a client’s ultimate financial success.

Together with business partner Richard Brannelly he runs CommonCents Financial Planning.

Email or call 1300 376781 today for an appointment and CommonCents Financial Planning will give you the answers you need to worry less about money and achieve the lifestyle you’ve always dreamed of.

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