Retirement planning case study: Couple aged 58 and 60

The current interest rate on the couple’s home loan is 3.99%, so repaying the mortgage would provide a tax-free return of 3.99% per year in the form of reduced interest expenses. Meanwhile, Dan’s super is earning 6.1%, before tax and fees.

Because they have no difficulty meeting their monthly repayments from their combined after-tax income of $122,361 and are on track to repay their mortgage before they retire, Dan decides he would rather have his full windfall earning compound interest of around 6% from day one, in a savings environment where he won’t be tempted to dip into it until he retires.

Individuals can make non-concessional (after-tax) super contributions of up to $100,000 per year or $300,000 in any rolling three-year period, so Dan is within the limit. These contributions are not taxed going in, while earnings in the fund are taxed at 15% rather than your marginal tax rate.

The couple currently have a joint super balance of $350,000. Dan makes personal tax-deductible contributions of $600 per month while Jenny’s employer contributes 9.5% of her salary, or $8,075 per year.

If they do nothing, according to MoneySmart’s Retirement Planner calculator they will have an estimated super balance of $477,342 when they retire at age 67 which will provide retirement income of $55,745 per year until age 90.

Initial estimated annual retirement income until age 90

Source: MoneySmart Retirement Planner

But if Dan contributes $170,000 of his inheritance as a one-off non-concessional (after-tax) contribution, they will have an estimated super balance of $651,172, and estimated retirement income of $60,227 per year.

Revised estimated annual retirement income until age 90 (after one-off contribution)

Source: MoneySmart Retirement Planner

This is close to the ASFA Retirement Standard’s comfortable retirement budget of $60,843, but well short of their current standard of living.  If they set their target retirement income at 66% of joint net income, they would need $80,758 per year.

To boost their retirement income, they could use all their super by age 85 which would give them $71,816 per year.

Alternatively, they have the financial capacity to increase their concessional contributions and are currently well within their individual annual cap of $25,000 per year. If Dan increases his contribution to $800 per month and Jenny salary sacrifices $400 per month, they would have $61,472 per year until age 90, or $71,355 per year until age 85.

Revised estimated annual retirement income until age 90 (after one-off contribution and increased ongoing contributions)

Source: MoneySmart Retirement Planner

These are back-of-envelope estimates only. Dan and Jenny have some complex decisions to make if they want to give their savings a significant boost in run-up to retirement.  They decide to seek professional advice from a licenced, independent financial adviser who can walk them through their options.

Learn more about how to plan your own retirement.

Note: The MoneySmart retirement planner calculator used for these projections makes certain assumptions. For example, it assumes ‘Balanced’ annual investment returns of 4.8% before tax and fees until retirement and a more conservative 3.8% after retirement. It also makes assumptions about fees. You can change these assumptions if they don’t align with your risk profile or your super fund’s fees and long-term returns.

For an illustration on the difference returns can make to your retirement balance see the following SuperGuide articles:

• Low yields: A $1 million retirement on 3% or 2% returns
• Crunching the numbers: a $1 million retirement (7% and 5% returns)