Q. With the new financial year, my husband and I would like to take stock and focus on planning for the financial year ahead. He is 52 and I am 50. His income is $170,000. I have returned to work 3 days a week and my part time income is $36,000. We have two children; one at Uni and one doing the HSC. We renovated our house a few years ago and the mortgage is around $145,000. My husband has $620,000 in Super and I have $85,000. We plan to retire when my husband turns 65. It’s hard to calculate our current living expenses with the kids at home but feels that when we retire we would like an income of $60,000 a year. How should we approach this?
A. Whether it be the Calendar or Financial Year, a “new year” provides a great opportunity to take stock, reset and plan for the year ahead and beyond.
I would strongly recommend that you sit down together and agree to your planning goals. Prioritise these goals and set time frames to achieving them.
Understand what your living expenses are. This will identify the income you have available to fund retirement, reduce debt and your other goals.
Other questions to consider could be; Where do you plan to live in retirement? Are you likely to receive inheritances? Do you plan to have any major future capital expenses? Are you planning on helping the kids? Any other goals?
Once the goal setting and time frames are determined, then you can focus on what strategies should be considered.
Critically evaluate how much income you are looking for in retirement. For example, if you currently spend $120,000 a year and you think you will need $60,000 a year in retirement, what impact does the 50% reduction in income at retirement have on your lifestyle expectations? The earlier you identify a realistic retirement income goal, the sooner you can commence addressing any funding shortfall.
Use the Superannuation system to your benefit. Given you have 13 years until your husband turns 65, it would be wise for your husband to consider salary sacrificing into Superannuation. Assuming he receives 9.5% Superannuation Guarantee Contributions (SGC), he would be limited to salary sacrificing $8,850 p.a to reach the cap of $25,000 p.a. Tax on the contribution would be at 15% compared to his income Marginal Tax rate of 37% + Medicare Levy.
There are also benefits for you to salary sacrifice to Super. Based on your income, presumably, your employer provides $3,420 p.a. SGC, you could in theory salary sacrifice up to $21,580 p.a. Tax on the contributions would be at 15% so be careful not to Salary sacrifice your taxable income below $18,200 which is the point that you pay no personal income tax.
You could also consider making a personal after-tax contribution to Superannuation. As your taxable income is $36,000, the Government will make a Co-contribution of $500 if you contribute $1,000 or more into your fund. You will only just qualify as the cap on this benefit is income of $36,021 p.a or less.
Confirm your Superannuation fund remains appropriate to your needs; revisit where your Superannuation funds are invested, review the costs that you are paying and confirm that the portfolio is in line with your risk appetite.
Determine financially what would happen if either of you were to die or become incapable of earning an income. Review your insurance to cover this financial gap. Structure the insurance as tax effective as possible.
Ensure you have nominated beneficiaries on your Super funds in the event of death. If you have nominated each other as reciprocal beneficiaries, the proceeds should be tax-free.
Please review your Wills and ensure they reflect your wishes. You should also consider granting each other Enduring Powers of Attorney and Enduring Guardianship so that you manage each other’s financial and personal affairs in the event of sickness or accident.
Surplus cash flow can be channelled to paying down the mortgage quickly as part of your overall strategy.
This list is not exhaustive and is meant as a general guide to prompt discussion. Importantly seek professional advice for a tailored solution to your planning needs or to check you are on the right track.