Five strategies when you’re five years from retirement
If you’re just a few years from retirement, it’s time to take control and do everything you can to maximise your super savings. Here are five strategies to help.
When you’re moving closer to retirement, every dollar counts. Here’s why:
– We’re living longer. For instance, if you’re a 65-year old woman now, you’re likely to live to at least 87, while if you’re a man of the same age, you can expect to live to about 841 And Australian life expectancies are increasing all the time.
– As well as living longer, we’re staying more active in retirement, thanks to improving health care and living standards. While that’s good news, it also means you’ll need more money to support your lifestyle after your work life ends.
So you should make the most of your resources now while you’re still earning.
Here are five ways to do that.
1. Use salary sacrifice
Salary sacrifice is one of the most effective ways to boost your super. If you’re edging closer to retirement, you’re likely to be in your peak earning years, so now’s the time to put some of that money away for your future.
The big benefit of salary sacrifice is that your super contributions are generally only taxed at 15% (although the government is set to double that rate on some contributions for people earning over $300,000 a year). That can make salary sacrificing into super much more effective than an after-tax investment.
For example, if you’re on the top marginal tax rate of 46.5% (with Medicare Levy), salary sacrifice could give you a 31.5% tax break upfront. But keep in mind that that the current concessional contributions cap is $25,000.
2. Consider transition to retirement
If you’ve reached your super preservation age (that is, if you’re 55 or more), you might want to think about a transition to retirement (TTR) strategy.
This strategy lets you draw a pension from your superannuation, even if you’re still working. This means you may be able to cut the number of hours you work or increase your contributions into super.
The end result could be a larger super account balance or additional income in the run up to retirement, plus the chance to reduce your tax along the way.
3. Make a lump sum contribution
If you receive a lump sum from an inheritance, a redundancy or a property sale, you might be tempted to put the money straight into your super. But this isn’t always the best strategy.
Depending on how much tax you’re currently paying, you could be better off keeping your lump sum invested outside super, and increasing your salary sacrifice to take full advantage of your concessional cap ($25,000). You can then use some of that lump sum to supplement the income you’re putting into your super.
4. Use the bring-forward rule before you turn 65
Currently, there’s a $150,000 limit on the amount of non-concessional (after tax) contributions you can make each year. However, by using the bring-forward rule, you can combine three-year’s worth of contributions in a single year, making a non-concessional contribution up to $450,000.
This could be an advantage if you have a large lump sum available – for example, if you’ve just sold an investment property. But you can only start using the bring-forward rule before you turn 65, so it’s important to plan ahead.
Remember though, that if you sell an asset (such as investment property) while you’re still working, you’ll be subject to capital gains tax. That may mean you’d be better off selling it once you retire when your marginal tax rate is lower. One possible strategy is to take out a short-term loan against your asset to fund your super contribution, then sell the asset and pay off your loan once you retire.
Remember, tax laws are complex and everyone’s situation is different, so it’s essential to consult an adviser before you act.
5. Review your insurance
As you get older, you may find that your wealth is greater and your debt lower (or even better, non-existent). If this is the case, check that you’re not over-insured when it comes to your life and life and total and permanent disability (TPD) insurance.
If you are, it makes sense to reduce your cover. You can then use the income you save on premiums to increase your salary sacrifice, pay off any existing debt or make after-tax contributions to your super.
Talk to an adviser
It’s a good idea to talk to a financial adviser before you act.
1Australian Bureau of Statistics, January 2012
Published by Colonial First State – Posted 24th August 2012
This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 24 August 2012. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.
Copyright © 2012 Colonial First State Investments Limited.
All rights reserved.