Can you afford your dream retirement?

Planning your dream retirement can be an exciting time. The chance to travel overseas or around Australia without having to rush back to work, time to pursue new hobbies, learn a language or spend time with the grandkids. The possibilities are endless, but what will it cost?

Working out how much you will need to live the dream, and what you can afford will come down to a variety of factors. These include whether you own your home, the value of your superannuation and other investments, the return you earn on those investments and your spending patterns. You may also have a younger spouse who will be dependent on income from your investments after you die.

And that’s the big unknown, because none of us know how long we will live.

Plan for a long life

Today’s 65-year-olds can expect to live to an average age of 84.6 years for men and 87.3 for women, or roughly 20 and 22 years respectively in retirement. That’s a long time, and it’s only an average. Half will live longer than that, many into their 90s.i

The challenge is to ensure your cash lasts the distance, however long that may be. You may retire at age 65 but your money needs to keep working to produce the returns you need to live out your days in the style to which you have become accustomed.

A good way to begin thinking about your retirement needs and working out a budget is to visit the ASFA Retirement Standard, where you will find detailed budgets for different households and living standards.ii The budgets are updated quarterly and assume people own their own home.

Adding up the costs

As at June 2018, the ASFA Retirement Standard calculated that singles aged around age 65 would need $27,425 a year to live a modest lifestyle while couples would need $39,442. A comfortable lifestyle would cost $42,953 for singles and $60,604 for couples. The comfortable budget allows for higher spending on things such as health, insurances, home improvements, clothing, eating out, entertainment and travel.

To put this in perspective, the full age pension is currently $23,823.80 a year for singles and $35,916.40 for couples.iii As you can see, this does not stretch to ASFA’s modest budget, let alone a comfortable lifestyle, especially for pensioners who are paying rent or still paying off a mortgage on top of other expenses.

Of course, everyone’s income needs and lifestyle will be different. Some people may need to spend more on their health, while a contented gardener and homebody may need less money than a keen global traveller with a season ticket to opera, theatre or football.

It’s also important to recognise that your spending patterns are likely to change in predictable ways over the course of your retirement, determined by your health and mobility.

The three stages of retirement

Most people go through three phases of retirement. The timing of each phase will be different for everyone, but the sequence is the same.

  • The active years. Most Australians currently retire by age 65, although there is a growing trend to maintain some connection to the workforce on a part-time basis. Either way, in your 60s and 70s you finally have the flexibility to travel, spend time with the grandkids and pursue other interests. Expenditure is likely to be high, especially if overseas travel is high on your bucket list. You may also want to help your adult children buy their first home.
  • Slowing down. At some point the joints get a little creaky and niggling health problems may emerge. As your mobility and activity decline so does your spending. Travel is closer to home, you may do some voluntary work and begin to live a little more frugally. Spending on health may increase and many will consider downsizing their home.
  • The frail years. Most of us hope to remain in our own homes, but many will spend our final years in residential aged care. This may be due to increased frailty, a sudden medical event or cognitive decline. Whatever the reason, spending on health and aged care are likely to increase significantly during this phase. While government subsidies may reduce the out-of-pocket costs, having savings will increase your options and access to high quality care in your own home or an aged card facility.

Seek professional help

Australians are living longer, healthier lives which means many of us can expect to enjoy almost as many years in retirement as we did in the workforce. And that requires careful financial planning.

Before you can set financial targets and investment objectives, you need to work out what your dream retirement might cost.

If you would like help to make your retirement dream a reality, give us a call.



How to make retirement less taxing

Planning your retirement isn’t just about what you are going to do once you stop work. It’s also about planning the actual process to make the most of your accumulated wealth. This includes tax planning. After all, the less tax you pay, the more you can spend on the things that matter most to you in retirement.

To begin with, you might want to consider the month in which you retire. If it’s a retirement brought on by redundancy, there could be a healthy lump sum with accumulated long service leave or holiday leave. Waiting until the anniversary of your employment date may make a difference to your payout as the formula is based on the number of complete years. Whether or not you are retiring due to redundancy, waiting until the start of the new financial year may reduce your tax liability.

Genuine redundancy payments are tax free up to a limit based on your number of years of service. It’s a flat dollar amount plus an amount for each complete year of service. Any amount above this tax-free sum is treated as an Employment Termination Payment (ETP) and is taxed depending upon your age and the components that make up your payment. Golden handshakes are taxed as ETPs.i

Employment Termination Payment Tax treatment

Component Tax treatment*
Tax free Tax free
Taxable component (under age 55 during the income year payment is received) – 31.5% up to concessionally taxed ETP cap
– 46.5% on balance
Taxable component (at or over age 55 during the income year payment is received) – 16.5% up to concessionally taxed ETP cap
– 46.5% on balance

*Includes Medicare levy of 1.5 percent.

Consider taking a holiday

Holiday pay is also an area to consider. It may be worth your while to stay in employment and take your holidays immediately before you retire. That way you can still be accumulating holiday leave while you are taking the holiday and you will also be entitled to superannuation guarantee contributions! All this is lost if you take your leave as a lump sum payment.

Some companies offer approved early retirement schemes to encourage certain groups to retire early. Like genuine redundancy, these payments are tax free up to a limit based on the number of complete years the employee has worked for the employer. Any amount above the tax-free limit is treated as an ETP.ii

Selling a business

If you are selling your practice or business, you may benefit from the small business capital gains tax (CGT) concessions. Provided you have net assets of less than $6 million and a turnover of less than $2 million, you may qualify as a small business. If you have owned your business asset for more than 15 years, then it is CGT-free. If you are under 55 then the capital gain up to a lifetime limit of $500,000 must be rolled over into your super to benefit from the retirement concession. This is not the case if you are aged 55 or over.

Regardless, you should consider putting the funds from the sale (the proceeds under the 15-year exemption and the capital gain under the retirement concession) into your super as this “contribution” is carved out from the new rules which reduce the non-concessional contributions caps.

It’s worth noting that while the maximum you can roll over into pension phase is $1.6 million, there is no limit to the amount to which the balance can grow through capital growth and returns.

Any excess above the $1.6 million can remain in the taxable accumulation phase. While you will pay a maximum of 15 per cent tax on earnings and 10 per cent on capital gains in the accumulation phase, this may still be less than you would pay outside the super environment.

Age at retirement

The age you retire is also significant. While money in the pension phase of super is tax free, income payments are also tax free once you have turned 60. So it may make sense to hold off drawing down your super until you have reached that age.

If you are at or over the preservation age (55 if you were born before July 1960) but under 60, then all your concessional contributions to super and fund earnings are taxable. However, the first $195,000 is tax free when taken as a lump sum. If you opt for an income stream, then the taxable amount is taxed at your marginal tax rate but you will be eligible for a 15 per cent tax offset which could reduce your tax payable.

Your non-concessional contributions to super – those that were made with after-tax money – are, and remain, tax free.

Of course, it’s likely that you will also have money invested outside super. If you are aged 65 years or more, then the seniors and pensioners tax offset can see you earn $28,974 each as a couple a year before you will pay any tax. That’s $57,948 a couple. The amount for a single is $32,279.iii

Retirement is for the rest of your life, so it’s worth taking time to plan ahead. Call us if you would like to discuss how you can make the most of your retirement nest egg.



iii ‘No tax in retirement because you SAPTO’,Super Guide 9 November 2016,