How Much Do You Need to Retire?
How Much Do You Need to Retire?
If you feel like the answer to this question is a constantly moving target, you’re right. The equation for how much you need to retire can become a complicated one. Especially if you dig past “how much money per year do I need” and start delving into factors like tax concessions, caps, sequence of returns, imputation credits, Capital Gains Tax … I could go on. So how much do you need to retire?
Recent changes to tax rules around Superannuation balances have created some consternation. So let’s take a look at what they actually mean, and at what factors you need to consider at the different stages throughout your life. Because if there’s one thing about Superannuation that remains constant, it’s that you’re playing a long game here.
The New Rules Explained – Briefly
You’ve no doubt seen and heard a lot in the media about the government raising the tax rate on super balances above $3million from 15% to 30%.[i] Whilst this is true, it’s not quite as simple as it seems. Let’s take a look at some of the relevant points.[ii]
- Income on super balances in pension phase up to $1.7 million is not taxed, while 15% is paid on income from balances in super above that.
- 15% is what we call the ‘headline’ amount. In actual fact, depending on your asset allocation, when you factor in imputation credits, capital gains tax and other benefits, the actual rate is more like 8%.
- The cap of $1.7 million is indexed, so by 2025, the cap will be $2 million.
Under the new rules:
- Only income on the portion of the balance over $3 million in super, and excluding the pension balance, will be taxed at 30%. With the benefits mentioned above, this will effectively be more like 22%
- There is no plan, at this stage to index this figure. Unless future governments decide to change it, the $3 million limit will continue to apply
- Only 0.5% of Australians will be impacted by this increase, although as time goes by inflationary factors will increase this percentage
- This rule does not apply retrospectively, so any income earned before the change becomes law will not be affected
Clear as mud? Don’t worry. Firstly, the details have yet to be finalised. Secondly, a good financial advisor will be able to look at your personal circumstances and let you know where you stand.
How Much DO You Need to Retire?
Accepted wisdom is you should aim for a super balance that will provide you an income of 50-70% of your pre-retirement salary or wages. This would require you to save approximately 15% of your income for 40 years. At present, employer contributions are 10.5% per annum, and will rise to 11% on 1 July 2023. So how and when do you make up the shortfall?
Each stage of your life presents different challenges, and provides opportunities for different strategies.
Young, Single & Independent
- Given the need to put money away for around 40 years in order to retire with sufficient funds, it’s a good idea to start putting money into super as early as possible, even it it’s only a small amount
- Maximise Government contributions, particularly if you are in a low income position
- Disability Insurance provided through Super may be your most cost effective way of protecting your income at this stage
- While we all have an innate ‘risk profile’ this is the time when you might like to consider higher risk investments, as they provide higher returns, and you still have many years in the workforce to recoup any potential loss
A Family & a Mortgage
- Your focus may be on repaying a mortgage, and your family home can definitely form part of your overall retirement strategy, but try to continue to make small contributions
- This is an important time to protect your income as you likely have high debt levels. Life, disability and income insurance are worthwhile investments at this stage of life
- This may be a time when you can optimise tax and super benefits around spousal contribution, particularly if one partner is working part time while caring for young children
- Review your risk strategy to ensure you are still happy with your level of risk and return
The In-Between Years
- As your income increases, and your mortgage decreases you may have additional funds freed up to increase your superannuation contributions
- Look carefully at salary sacrifice, to ensure you remain within your contribution balance limits
- This is a good time to reassess how much you need to retire, based on your personal circumstances and the market conditions
- As you move from one life stage to another, always review your risk profile as you may wish to reduce exposure to losses as you move closer to retirement
- Review the type and level of insurance you carry to ensure your dependents are taken care of should the worst happen
Retirement Looming (maybe)
- Once you hit 55 the levels of salary sacrifice and other contributions you can make to super change and it is important to take advantage of these changes as much as possible
- Take a look at a combination of salary sacrifice and transition to retirement accounts to maximise your tax benefits
- Review your insurance cover, as well as your risk profile and investment strategy as you will not have long to recoup any losses experienced at this stage
- Once you are into your 60s, many of the rules around tax and withdrawals change
- If you are not ready to retire, but want to slow down, look at the impact potentially switching to part time work might have on your income and retirement savings
- Review your position to ensure you will remain comfortable once a full time wage is no longer coming in
We’ve said many times, it’s never too late, or too early, to start planning for retirement. The important thing is that you do have a plan regarding how much you need to retire.
If you are concerned about the amount of money you are likely to have in Superannuation when you retire, whether you think it might be too much, or not enough, Manly Financial Services has access to the information you need to make the best decisions for your financial position, both now and in the future. Give us a call on (02) 9976 3388, or contact us via the below link.