Transcript
John and Helen are planning to retire in the next few years, and they’re ready to get stuck into making a detailed retirement plan. Helen is currently 60 and earning an income of $90,000 per year. She has $850,000 in her super account. John is a little older at 62, and he’s earning $200,000 per year. His super balance is $950,000.
The couple don’t have investment assets outside superannuation because they focused in the last few years on contributing any savings outside the system into super to maximise their tax-effective retirement income. They’ve also focused on boosting Helen’s balance, given that she’s a lower income earner, to make sure that they’re both on a more level playing field at the time of retirement. They currently have a home mortgage that they expect to have repaid by the time John retires, and they’re both maximising their salary sacrifice to super within the contribution limit that applies.
When the time comes to apply for age pension, Helen and John expect that they will declare $80,000 of assets outside of their superannuation savings. That’s higher than most people declare, but takes into account that they have good quality cars and home contents that would fetch a good price on the second-hand market.
John and Helen’s retirement goals are to stop working at age 65. That means John will retire two years earlier than Helen, who is two years younger. They’d like a retirement income of $150,000 a year to enjoy extensive travel and restaurant meals. John and Helen would like to keep their family home for at least to enjoy the space while their grandchildren are still young enough to want to sleep over. They’re also looking to minimise any tax that their adult children would pay if they inherit superannuation after they pass away.
To start their retirement planning journey, John and Helen run a projection to see how long their super savings will last if they start simple account-based pensions and draw the $150,000 a year income that they would like. As you can see, the result of the projection indicates that their super savings would run out at the age of 85 if they follow their plan. This projection takes into account their current balances and the contributions that they’re making to superannuation before they both plan to retire.
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At SuperGuide, our members often ask for calculators that can take into account members of a couple retiring at different times. And thankfully, this tool does. You can see that in the first year of John’s retirement at age 65, the tool is still displaying Helen’s income from work towards their retirement income goal. The calculator also displays how the balance is expected to change over time. In black, the age that it’s likely to run out is highlighted. Further along the row there, you can see a square around age 90, which indicates that that is the life expectancy of this couple.
Importantly, 50% of people will outlive their life expectancy, so John and Helen certainly do need to do something to change their retirement plan and make sure that their savings don’t run out. This calculator is the Telstra Super Retirement Lifestyle Planner, and you can watch our separate video demonstration to understand more about how it works. The first change that John and Helen consider for their retirement plan is updating their income goal. They run a new with income of $140,000 a year for their early retirement and $100,000 a year once John turns 80. After that point, they expect to stop travelling internationally and have lower income needs. These changes do make a significant difference with the superannuation projected to run out when John is around 94.
The age pension is also making an important contribution here, and it’s shown in the green bars in the this graph. That age pension starts to become payable when John is 79. The couple were not initially eligible for any payment when they first retired because of their high value of assets. But over time, drawing income has reduced that value and made them eligible. It’s very important that you keep track of your assets and the limits that apply to receive age pension throughout your retirement and apply as soon as you become eligible.
The age pension not only makes an important contribution of income, reducing what you need to draw from your private savings, but also reduces expenses for things like medication, rate, rates and utilities. John and Helen are still concerned about the risk of their savings running out. They run another projection, assuming that they both use one quarter of their super savings at retirement to purchase a lifetime income stream. This product is guaranteed to provide income for life no matter how long its owner lives. In John and Helen’s case, they’ve modelled a product that tracks the investment return of a balanced option and also revert to their spouse should they pass away.
For example, if Helen was to die, her income from the lifetime product would continue to be paid to John until he passed away. Being Getting linked to investment returns does mean that the income you receive from the product can be lower one year than it was the previous year if investment returns have been negative. The trade-off is that over the long term, it should provide more income than a product that is only linked to inflation increases.
You can see that product modelled here in the orange bars in the graph. You can see that the income level that is provided does fluctuate from year to year. Of course, this is only a projection. It has assumed investment returns built in, and the real returns could be different and occur with different timing. But this can give John and Helen an illustration of what may be possible. With this projection, they can see that using a lifetime product means that there is a higher likelihood they can maintain their desired income level for longer throughout their retirement beyond the age of 94 that was illustrated in the previous projection. This is for a number of reasons.
Firstly, it’s because the lifetime products that they have chosen are favourably treated in Centrelink’s means tests. Only 60% of the purchase price is counted as an asset initially, and when they turn 84, that will reduce to 30% of the purchase price. That means that their age pension starts to become payable sooner. You can see here it kicks in when John is 76, which is three years earlier than before. It’s also paid at a higher rate. That means that they’re drawing less from their own savings and receiving more from each pension, extending the length of time that their savings will last.
The other reason is that adjustment that is made to the income payment from year to year based on investment returns. In their simple account-based pension, they’re drawing the level of income that they want regardless of how the investments have performed. That means that after a crash, they’re selling assets at a loss to finance their income payments and significantly eroding their balances. In the lifetime product, the income is automatically adjusted, so it reduces after a poor investment return to give the asset’s time to recover and draw more income in subsequent years. It’s not John and Helen who are managing that, it’s the product provider who guarantees that that income will always last for life.
John and Helen are happy with their new retirement plan, but still have some more things to consider. They want to eliminate the super death tax that would be payable by their adult children if they inherit money from their superannuation when they pass away. To do this, they can use a recontribution strategy. Essentially, a recontribution strategy converts taxable superannuation into tax-free superannuation by withdrawing it and then recontributing it as an after-tax or non-concessional contribution that will form a tax-free component in super. You can read more about it in our article, including calculator on Superguide.com.au.
In John and Helen’s case, they would plan to withdraw and recontribute the non-concessional cap amount in the first financial year after they retire. In the second financial year, they would withdraw and recontribute three times the non-concessional cap amount using the bring forward rule. That means they can get in four years’ worth of contributions over a very short space of time just after retiring. Their contributions will be made to a new separate superannuation account that will hold their tax-free components. That means later on, when they want to make more withdrawals to recontribute, they can withdraw from the account that only holds taxable money and maximise the effectiveness of their strategy. We have a case study that illustrates this process in more detail.
John and Helen will also plan in the fifth financial year after retirement to Pursue another withdrawal and recontribution, again of three times the cap amount at that time. They may need to go ahead and make more withdrawals and contributions later on in the eighth year if they still have any taxable components in their superannuation. This strategy can be complex to implement, so you may need the help of a financial planner to get it underway. If this is followed through all the way to the end, John and Helen can ensure that they will only have tax-free components in their superannuation, and if they do die with balances still in super, those will be passed on tax-free to their beneficiaries.
John and Helen are also prepared to consider using some of the equity in their home in their later retirement to generate additional income if required. One way they can do that is by making a downsizer contribution to super. The downsizer contribution is up to $300,000 per person, so $600,000 in total for a couple, and it applies when the primary residence is sold after being owned for at least 10 years.
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If John and Helen did downsize after that first 15 years of retirement, they may have additional savings after purchasing a new property to live in that they could use to contribute to super using this downsize and measure. To make a downsize a contribution, an individual needs to be 55 or more, but there’s no upper age limit. Generally, superannuation contributions can’t be made once you’re 75 or more, but this doesn’t apply to downsizer. You can continue to make downsizer contributions into your older age.
The contribution also isn’t counted towards any contribution caps, so your total superannuation balance and any other super contributions that you have made are not important. You can still go ahead and make a downsizer contribution. You can read more about downsizer in our article and view our webinar for much more.
Another option to use equity in the home to generate retirement income is the Home Equity Access Scheme. This is a reverse mortgage provided by Centrelink, and it provides regular fortnightly payments that accumulate as a loan that must be repaid with interest when the property is sold. The maximum amount that can be received is one and a half times the full rate of age pension, and that is made up of any age pension that you’re already receiving plus the loan.
For example, if you were receiving the full rate of age pension, you could borrow the other 50% from the Home Equity Access Scheme. That’s designed to be paid to you in regular fortnightly amounts, but can also be paid in up to two lump sums every year. This scheme has a lower interest rate than commercial reverse mortgages. At the time of recording, it’s 3.95% per annum. It also has a no negative equity guarantee. That means when your property is sold, if the price you receive is lower than the loan amount that needs to be repaid, Centrelink will not pursue your estate. For the excess amount that is owed on the loan. That no negative equity guarantee also applies now to commercial reverse mortgages that are issued in Australia. You can have a look at our article on the Home Equity Access Scheme to learn more about it.
John and Helen are satisfied now with their full retirement plan, which consists of a change to their income goals, a lifetime income stream, and the potential that they could use the equity in their home to generate retirement income in their later years if required. Plus, that recontribution strategy that will ensure their adult children don’t pay any tax if they inherit superannuation.
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