As with most major life events, proper preparation for retirement can help make the transition into that phase of your life – much more enjoyable and a lot less stressful. Some planning can also help you make the most of your income during retirement, giving you the financial freedom to truly enjoy your downtime. Here we list a few tried and tested strategies for maximising your income during retirement.
1. Top up your part-time salary
As you head into the retirement phase, you may begin by scaling your full-time job back to part-time hours. If you are over the age of 55, you can invest some of your super in a ‘transition to retirement’ (TTR) income stream. By doing so, you could receive a tax-effective income to top up your reduced salary and pay less tax on investment earnings.
2. Boost your super without reducing your income
Similar to the above strategy, this uses a TTR income stream to replace your reduced salary. However, this strategy involves sacrificing some of your pre-tax salary into a super fund. You can make arrangements with your employer to directly sacrifice a portion of your pre-tax salary into a super fund. You would then invest some of your existing preserved or non-preserved super into a TTR income stream. The regular payments from the TTR would, in turn, subsidise the income you sacrifice into super.
3. Eliminate lump sum tax
If you are retiring between the ages of 55 and 59, you can start an account-based pension instead of taking a cash lump sum. This will eliminate the lump-sum tax and allow you to receive a tax-effective income to help cover your living expenses. If you do need to receive some of your super as a cash lump sum, you may want to consider putting this off until after the age of 60. Better enabling you to make tax-free withdrawals.
4. Cash-out on non-super investments
If you own an investment outside of superannuation (such as a term deposit or other asset where capital gains tax is not applicable), you can cash out the investment to make a personal after-tax super contribution. You can then start an account-based pension so that:
- No tax will be payable on earnings, and
- You may receive a more significant tax-free income in future years.
Making personal after-tax super contributions, may also qualify you for a government co-contribution of up to $500.
5. Offset Capital Gains Tax (CGT)
As with the strategy above, you can cash out your non-super investments and start an account-based pension. After paying Capital Gains Tax, you can use the remaining amount to make a personal after-tax super contribution. A portion of this can be claimed as a tax deduction. This deduction could then offset some (or even all) of your taxable capital gain, reducing or even eliminating your CGT liability. This strategy could ultimately enable you to start a larger account-based pension and stretch your retirement savings even further.
6. Reinvest super
If you’re aged between 55 and 59 and meet the conditions of release, you may be eligible to withdraw a limited amount of your super benefit, tax-free. You could then use this amount to make a personal after-tax contribution before starting an account-based pension. This would form part of the tax-free component of your super benefit, ultimately enabling you to boost the tax-free income payments you receive from your account-based pension between the ages of 55 and 59.
7. Free up home equity
As you ease into retirement (and the kids have well and truly left the nest), downsizing your home may be appealing for many reasons. Less maintenance, lower running costs and less time taken to tidy and clean every day are just a few! If you are over the age of 65 and meet certain eligibility requirements, you can use the proceeds of selling your home to make a downsizer contribution of up to $300,000 into your super. After the contribution has been made, you can use the amount to start an account-based pension (providing it does not exceed the $1.6 million transfer balance cap).
Whilst not all of these strategies will be relevant to you and your individual circumstances, we are confident you will find at least a few tips here that can help make your retirement a little more comfortable. If you would like to discuss a tailored financial plan for your circumstances, contact us now for an obligation-free quote.
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