Retirement planning case study: Hassan, 60

Transcript

For this case study, let’s meet Hassan. Hassan is 60 and has recently been divorced. During the divorce process, the family home was sold, mortgage was repaid, and with the settlement money, he’s been able to buy himself a comfortable studio apartment to live in.

He earns a good wage of $100,000 per year and as far as superannuation goes, his current balance is now $250,000, much less than he originally planned because the remainder of his balance has been split to his ex-wife as part of the divorce. He doesn’t have any other assets or savings that he can use to help fund his retirement.

When he thinks about retirement, Hassan has some pretty clear goals. He wants to travel his state and the wider country, and for that, he’d like to buy a camper trailer when he retires. He’d also like income of around $60,000 per year to maintain the lifestyle that he’s become accustomed to. To make this happen, he’s prepared to work until he’s 70, and at that point, either stop completely or at least reduce his working hours.

To model Hassan’s retirement, we’re going to use this tool from TelstraSuper called the Retirement Lifestyle Planner.

In the first step, we’ve just inserted Hassan’s personal details. So he was born in 1964, and he’s earning $100,000 per year. He also has that super balance of $250,000. He’s not currently making any contributions to super, so we can just click the next button to move on to his goals. In this section, I’ve inserted Hassan’s planned retirement age of 70 and the income that he wants of $60,000 per year. Here we can also add that he wants to purchase that camper trailer and take that into consideration. So I’ve done that by listing it as a hobby expense that he expects to cost $25,000 just as a one-off and starting at age 70, which is when he plans to retire.

If we click next, we can see how the tool will model his retirement income based on those circumstances. So looking here at his income graph, we can see that the tool is predicting his super will last at least until he’s 84. Now, Hassan is not 100% satisfied with that, but he’s not prepared to sacrifice his lifestyle to make any additional contributions to super. A friend has told him that he might consider a transition to retirement strategy, which could allow him to keep the same take home pay, but still have more money going into his super account to build a bigger balance for retirement.

Let’s look at exactly how a transition to retirement strategy could work for Hassan. We know he earns $100,000 per year, and he’s paying income tax on that at the moment, which is reducing his take home pay to just over $77,000. He’s not prepared to live on less than that, but he does have the option to withdraw a transition to retirement pension from his super. Now, to be eligible for that, he needs to have reached his preservation age, which is 60, and he has done that. So he can withdraw up to 10% of the balance that he invests in a transition to retirement pension per year. In that first year, that will be $25,000 maximum that he can withdraw, and that is tax-free because he’s over the age of 60.

Hassan can use that tax-free income from super to replace some of his taxable income from work and instead direct that taxable income into his super in the form of salary sacrifice. By doing that, he can actually salary sacrifice significantly more than he is withdrawing from his super because that salary sacrifice is coming from his pre-tax income. So it’s not only reducing his take home pay, but also his income tax. You can see that that yellow bar is significantly smaller than it was before. So it’s a combination of his take home pay and his income tax that he was paying before that’s financing that salary sacrifice amount.

It is more than the current contribution limit of $30,000 per year for concessional contributions. And Hassan also has contributions coming from his employer that will count towards that cap. However, luckily, Hassan is eligible to use a mechanism called carry-forward for his concessional contributions. He has unused cap space from the previous five years that he can access in a rolling going forward way. That means he can contribute more than the standard cap and start using up some of that unused space from the prior five years. So there won’t be any penalty for contributing this excess amount.

That salary sacrifice will then affect his super balance. We can see it will go across into his super account, but he will have 15% contribution tax come out of that. That’s less than he was paying on his income tax, so it still saves him money, and he has $31,000 or so going into his super after that tax is deducted.

We also need to consider, though, that he is withdrawing $25,000 of tax-free income. So if we take that out, you can see he’s still left with an amount that’s going into his super, and that is an additional $6,315 that’s left over once we account for his withdrawals. So we can see, Hassan has managed to maintain the same take home pay, but he has $6,315 more going into super for that year.

To estimate the income following this strategy could have on Hassan’s retirement income, we can come back to the TelstraSuper Retirement Lifestyle Planner. Now, this tool is not designed to take into account a transition to retirement strategy, but we’ve run our numbers and worked out that Hassan can add roughly $6,000 after tax in the first year. So we can just add those in as contributions. To do that, we come across to the left-hand side and select Maximise regular contributions. Now, instead of $6,000, I’m just going to put in $5,000 to be a little bit more conservative about how much he can benefit each year as his circumstances and contribution caps will change over the years between 60 and 70 when he’s following this strategy.

By adding in those after-tax contributions, we can get a rough idea of the impact on the retirement income. We can see now that instead of lasting until 84, Hassan’s income is expected to last until 87. He’s pretty pleased with that, considering he didn’t have to reduce his take home pay at all, and he’s managed to generate an estimated additional three years’ worth of retirement income.

However, there are still things that Hassan can do to benefit further. He is prepared to continue working a little throughout his retirement, so we can add that in too and see the difference that it can make. We’ll close this regular contributions tab and come down to selecting that we’d like to work longer. So you can see here, Hassan can select his expecting to work during his retirement. And the tool is initially going to assume he earns his same salary of $100,000 per year. But Hassan expects that he would actually prefer to just do a little bit of consulting work and earn roughly $25,000 per year. And he’s prepared to do that for five years until he’s 75.

So if we add that into the tool, it will again recalculate and give us an estimate of the retirement income. You can see here the initial five years retirement income is lower. The first one is still high because he’s got that lump sum withdrawal for his camper trailer. But the gap here will be filled by his income from working, which isn’t being shown in the tool. However, it is considering the impact on his Age Pension, and it’s showing that even though he’ll be working and earning $25,000 per year, he’ll still receive a quite significant Age Pension during that time. So if we look at this year when he’s 71, he’d be receiving just under $15,000 worth of Age Pension, along with the income from his super and the income from his work. Now, the Age Pension income test is actually designed to benefit people who work. There is a feature called the Work Bonus that discounts some of the income you earn from working and doesn’t count it against you in Centrelink’s means tests. So Hassan is benefiting from that.

And if he is prepared to do that and continue to earn $25,000 a year for another five years until he’s 75, his retirement income is now predicted to last until he is 90, and he’s much more comfortable with that. Of course, if things do go wrong, he will have other options. He does still own his home, and he could consider selling that to generate further retirement income or even using a reverse mortgage in his later years if his superannuation balance is to run out.

SuperGuide members can access more education about the topics we’ve covered on our website. We have a comprehensive transition to retirement section that includes articles, a webinar, and Q&A’s. You can also find details on the work bonus scheme and options to use your home to generate retirement income through a reverse mortgage or Centrelink’s Home Equity Access Scheme.