Wouldn’t it be great to be able to leave work one day and wake up the next day with the same fortnightly pay you had while you were working? You could continue to do everything you loved doing – go out for dinner, travel, help your children out and maintain your home. You could buy a caravan and drive around Australia or see the world. I hear some great stories from clients about the wonderful time they’re having and that’s usually because they’ve put a lot of research and time into preparing for their retirement. These things don’t happen if you decide to start the journey three months prior to retirement.
Retirement leakage can eat away your income
One of the things you need to combat is what we call retirement leakage – all the unnecessary costs that fritter away your nest egg like tax. If you have an investment property portfolio, that retirement leakage might be paying body corporate fees, repairs to your properties, agent fees, tax, repairs and maintenance – these are all eating away at your income. I’ve seen retirees who haven’t structured their finances well and are losing money. While they might have a headline number they feel they’re earning, beyond that a lot of their money is being wasted.
The superannuation system is set up to avoid retirement leakage
One of the best ways to put together a fantastic nest egg in retirement is by using the superannuation system to maximise what you’ve built up over your lifetime. The government has set generous limits on superannuation, making it a great way to accumulate a retirement income with limited exposure to tax and other expenditure – in other words, with minimal retirement leakage.
Most people don’t realise the benefits of the superannuation system in minimising tax. Older people start to become experts in this area as they’re forced to understand it but you have to start more than three months before you retire..
Currently, most Australians can contribute up to $25,000 a year of salary to their super before tax, which is taxed in the superannuation system at a concession rate of 15 cents. Beyond this, you can contribute up to $100,000 per year in additional contributions to build up your superannuation if you’re in a position to do so. This might be through a windfall from selling a property, coming into an inheritance or just saving up.
There is a misconception that mandatory employer contributions of 9.5% are sufficient. When we run the figures, we find that it isn’t – you need to contribute closer to 16% of your income towards super for it to be enough in retirement. The earlier you can start making extra contributions to your super, the better. I had a boss who instructed all staff to start putting 5% of their pay straight into a superannuation fund. It was the best advice I’ve ever been given and you learn to live on less.
Superannuation is taxed in two different stages. As you accumulate money towards retirement, you’re taxed at 15 cents in the dollar. So if you buy and sell a share and you’ve made $100, you’ll pay $15 in tax to sell that share if it has been bought and sold within a year. If it’s held for more than a year you only pay 10% tax. But once you get to age 60 and beyond and declare that you’re retired, you don’t pay any tax at all.
The tax-free limits on accumulated superannuation are generous. They’re currently up to $1.6 million per person. So for a couple that’s $3.2 million a year or $3.2 million of accumulated superannuation you can have to generate a tax-free retirement. To most people that’s a lot of money – and these limits are only going to increase over time.
Superannuation is not just another investment – it’s a tax concession the government offers as an incentive for you to save money towards a comfortable retirement. You can choose how you want that money to be invested. By depositing money in super, you’re shielding that money from the full tax rate, while simultaneously reducing your taxable income. When you eventually call on this money, you won’t be taxed on it, and this means more money in retirement to do the things you enjoy.
Many more people are living into their nineties now, so you should plan for a 30-year retirement. The earlier you start planning for this the more we can do. So if you haven’t engaged in the system and you’re at a stage now where you need to start playing catch up, help is at hand. As a financial planner, I can often turn around someone’s superannuation with a 15-year run up – so age 50 is a good age to start planning seriously for retirement.
As you get closer to retirement, and typically that’s from age 50 through to age 60 or 65, we can really turbo-charge your contribution and live your best life in retirement.
Jason King is an Executive Advisor at Viridian Advisory
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