Q. I am 54 with $75,000 superannuation and my wife is 53 with $150000. Our combined income after tax is $5530 a fortnight. We have an equity loan of $450,000. We need to plan for our retirement. What should we be focusing on for the future?
A. The pre-retirement phase is the most critical time to get right. Assuming Retirement at age 65, you only have 11 years to get set. Whilst the information you have provided is limited there are a few key things you should look at.
When do you wish to retire? Have a clear idea of your time frame and employment expectations. You may plan to work beyond traditional retirement age. You may also consider transitioning out of the work force by moving to part time or working on a consulting basis.
Determine how much income you believe you want in retirement. Have a look at your spending habits and test it now. Your current take home pay is currently $143,780. Could afford to live on half of this amount which is $71,890 a year income in retirement? Are your lifestyle expectations likely to be met by cutting your cashflow by half?
How much capital do you need to fund that income. In 11 years that could be a substantial amount. For a self funded retiree, a typical rule of thumb is divide your income need by 5%. So for income of $70,000 a year in retirement, you would need $1.4 million in investment assets to fund that income for life. If you plan to downsize the family home, be realistic about how much capital you will have left to invest.
You make no mention of investment assets outside of Super but you have a debt. How to you plan to clear the debt and when? Asset sale or debt reduction from free cash flow?
Minimise the impact of tax on earnings now and into the future. Use the generous Superannuation system to your advantage pre retirement and post. In Super your contributions and earnings are taxed at 15% compared to your marginal tax rate that I estimate would be at least 38.5%. The tax savings go to your retirement as opposed to Canberra.
You should be targeting to Salary Sacrifice up to the allowable limits. At your age the limit is $25,000 Concessional Contribution Cap. This cap rises to $35,000 from 1 July 2014. Treat each tax year as a target and every year you don’t reach the Cap as a lost opportunity. If you retire at age 65, your current aggregate Cap over the next 11 years for Concessional Contributions will be $375,000. 1 year of $25,000 and 10 years of $35,000. For your wife it would be $400,000.
Be mindful of the restrictions on Non-Concessional Contributions to Superannuation; $150,000 per tax year or $450,000 every 3 years prior to age 65.
Funds invested via an Allocated Pension pay no tax on earnings within the fund up to $100,000 a year, 15% thereafter. Income drawn from the Allocated Pension are tax free to those over 60. Hence the importance of getting as much into the Superannuation system as possible.
Are your investment appropriate for your investment time frame and your risk profile? Are you taking too much capital risk or too little?
Finally, get financial advice. At the very least check that your current strategy is on track to achieve your goals. Better to find out now that changes need to be made rather than leave it until it is too late.