Retirement Planning Strategies For Australians
Written by: Chris Strano
Jeez Louise, you’ve landed on your feet here!
There are dozens of retirement planning strategies to reduce tax and maximise your super, so that you can give work the flick (asap) and kick your heels up ‘till you cark it.
In Australia, superannuation is generally the best way to save towards retirement. Right now, I’m going to load you up with as many retirement planning tips as I can, so that you can retire sooner and spend your days doing exactly what you want to do.
Let’s get stuck right in!
Retirement Planning Strategies
There are a number of retirement planning strategies available that can help you reduce tax and build wealth faster.
The number one retirement planning strategy is investing within super. The reason is this: All investment earnings within super are taxed at a maximum of 15% while you are accumulating towards retirement, and then 0% once you are in retirement. On top of this, you can get tax deductions for contributing to super and receive tax free pension income throughout retirement.
I’ve dissected a range of superannuation strategies into a few different categories for easier digestion.
Super Contribution Strategies
In addition to standard mandatory employer contributions, you are permitted to make extra super contributions, which can make your super last longer in retirement, or allow you to retire sooner.
Salary Sacrifice Contributions
Salary sacrificing into super is the process of telling your employer to pay a portion of your salary into super instead of having it being paid as a wage. The benefit of this strategy is that less of your salary is taxed at your personal marginal tax rate and more is invested in the tax-effective superannuation environment.
Personal Concessional Contributions
Personal concessional contributions are contributions you make into super using money from your personal bank account and then claim a personal tax deduction for the amount contributed. Similar to salary sacrifice contributions, personal concessional contributions reduce your personal income tax and allow you to invest more in super.
Non-concessional contributions are contributions to super using money from your personal bank account. Non-concessional contributions won’t reduce your personal income tax, but will place more of your wealth into super.
Also, making non-concessional contributions may entitle you to the Government super co-contribution or provide you with a spouse contribution tax offset.
Age limits and contribution caps apply to all types of contributions.
Transition to Retirement Strategies
Utilising a transition to retirement (TTR) pension can allow you to reduce working hours in the lead up to retirement, while still having adequate income to cover lifestyle expenses. A TTR pension may even encourage you to work for longer due to the reduced stress of not working full-time.
You may also consider a transition to retirement strategy while still working full-time. This involves salary-sacrificing part of your wage into super (to reduce personal income tax) and then covering any cash flow shortfall with tax-free income from super. You generally need to be over age 60 to reap the full benefits of this strategy.
Related article: How Much Super Do I Need?
Retirement Income Strategies
Once you do completely retire, you can use your super to start an account based pension. Not only can an account based pension provide you with regular tax free income, but all earnings received from investments within the account are received completely tax free, compared to being taxed at 15% in the accumulation phase.
On a balance of $500,000, this can save tax of $3,000 every single year, assuming a nominal income earnings rate of 4% p.a. Plus, it will eliminate any capital gains tax.
Even if you don’t need the pension income, you may be able to simply recontribute back into super. You see what I’m saying?
Related article: What is a Comfortable Retirement Income In Australia?
Death Benefits Tax Strategies
You superannuation is made up of two components: a taxable component and a tax-free component. For most Australian’s the majority of your account consists of the taxable component. This can result in a huge tax bill if you die.
There is usually no death benefits tax if you pass away and your super is paid to a spouse or partner. However, if you die and your super is paid to your adult children, tax of 15%, plus the Medicare Levy, is deducted from the taxable component of your balance.
This means, on a balance of $300,000, paid to an adult child, more than $45,000 in tax could be deducted from your super before it is paid to your child.
However, you may be able to implement a withdrawal and re-contribution strategy, which involves pulling out your total super balance and re-contributing it as a non-concessional contribution, which effectively converts taxable components to tax-free components and can eliminate potential death benefits tax.
Estate Planning Strategies
Do you know who is going to get your super if you die? Well here’s a few strategies that give you a bit of control over the matter.
Non-Binding Death Benefit Nomination
Submitting a non-binding nomination with your super fund gives your super fund an idea of who you would like to get your super if you die, but ultimate discretion remains with the super fund trustee.
Binding Death Benefit Nomination
Submitting a binding nomination with your super fund directs the trustee of your super fund as to who will receive your super in the event of your death. The trustee must follow your instructions and has no discretion.
Nominating a reversionary beneficiary for your superannuation pension income stream ensures your super pension continues to be paid to the nominated beneficiary if you were to pass away. This allows your balance to remain within super and seamlessly transfer across to the new pension recipient. It also gives 12-month relief towards the Transfer Balance Cap, which can be very valuable if you or your partner have a high account balance.
Retirement Planning Checklist
This retirement planning checklist can give you an idea of when you can afford to retire and how long your money will last throughout retirement.
|1||Calculate any capital expenses you have at retirement or during retirement (home renovations, new car, child wedding, etc.) and make an allowance for these||⬜|
|2||Calculate the annual expenses you expect to have each year in retirement, including travel / holiday costs||⬜|
|3||Use an Australian retirement calculator to see if the amount you have in super is sufficient to provide you with that level of income, plus capital expenses throughout retirement||⬜|
|4||Make necessary adjustments to your retirement plan to make it work (e.g. work longer, save more, reduce retirement expenses)||⬜|
Related article: How Long Will My Super Last?
Biggest Retirement Planning Mistakes
Here’s the top three biggest retirement planning mistakes I see people make:
1. Selling investments to cash
Through the Global Financial Crisis (GFC) and Covid-19 epidemic, many people decided to sell all of their investments within super and close down their super accounts at the worst possible time – after the damage had been done. Not only is it a mistake to sell investments after prices have fallen, but I am still gobsmacked that people pull their money out of super. You can invest in bank accounts and term deposits within super if you want! By pulling it out of super, you are losing all of the tax concessions within super and, if you’re over 65, you’re usually not allowed to get your money back into super.
2. Working longer than you need to
Stopping work for good can be a daunting thought. You will have no more earned income and you will become solely reliant on your super, other investments and possible Age Pension payments. Because of this, you may be hesitant to cut off that employment umbilical cord.
The main reason for the discomfort is that you might not be confident your super will provide you with the level of income you need throughout retirement. Sometimes, this means people continue working until health or old age prevents them. Don’t let this be you. Retire on your own terms, or at least transition to retirement sooner. You will always be able to find casual work if you need a cash-injection or work-fulfillment down the track.
Related article: What is Retirement Age in Australia?
3. Not getting advice
In the years leading up to retirement, financial planning advice is invaluable. How are you supposed to navigate through the endless reams of superannuation and taxation legislation, get across all of the strategies available to you and build your own retirement plan without any help? That’s like me saying I could step into your role at work and excel at it after a few weeks! We both know that’s not true, considering the experience you’ve had. If you’re ever going to seek financial advice, then the years leading up to retirement is the time to do it. The fee will usually always pay for itself, but more importantly you’ll have confidence in your retirement plan and can sleep easily. Just make sure you find yourself a good retirement planner.
Retirement Planning Advice
Retirement planning help and advice can come in many forms. You may choose to read articles from magazines and websites, you can watch video tutorials or subscribe to newsletters, or you can obtain personal retirement planning advice from a financial planner.
We live in a beautifully diverse country, but when it comes to your retirement plan, there’s only three types of Australians. Which one are you?
The ‘do it for me’ type of people find a financial planner who they trust whole-heartedly to completely look after their retirement plan. If you find the right financial planner, this can be a great solution and give you more time to spend doing what you love.
The ‘help me with it’ type have a bit of a handle of super, investments and financial planning, but see value in obtaining some form of retirement planning advice, because they know it will pay for itself. This approach can ensure you are optimising your retirement plan, while still holding on to the reins and having a full understanding of your overall strategy.
And finally, the ‘I’ll do it myself’ person who scours the internet looking for free information, which may or may not be outdated, and tries to use this to build their own retirement plan. This approach is rarely successful and most certainly won’t result in you having the optimal retirement plan. It’s likely you’ll make mistakes, miss opportunities and end up running out of money much sooner than intended.
Choose carefully, because as they say, ‘you’re a long-time retired’.