Robert came to DKM and is seeking advice on ways he can boost his superannuation to help fund his retirement.

Robert earns $50,000 per year as salary, with living expenses of $41,000, he has also accumulated $300,000 in super. Even though he’s reached the age of 55, Robert enjoys working, so he’s decided to keep working until he’s 65. One method that Robert can implement is to transition himself into retirement by using a pre‑retirement pension. During this period, his salary remains at $50,000 per year and his after-tax income at $41,700.

If Robert made no changes to his current situation

If Robert were to make no changes to his current situation, taking into account investment earnings1 on his super and the super guarantee contributions paid by his employer, by age 65 his retirement savings would be:

Retirement balance1 at 65 $493,930
Minimum pension on this balance $24,700

Robert utilising a pre-retirement pension strategy

If we establish a pre-retirement pension for Robert, this will allow Robert to further increase his retirement savings by using the
pre-retirement pension to supplement his income, which gives him a 15% pension tax offset that his salary income doesn’t. He can then sacrifice part of his salary to super, which can be used to offset the reduction in his retirement savings from the pension payments. Robert’s after-tax income remains unchanged:

Salary $50,000
(Salary sacrifice) ($14,791)
Minimum pension payment $12,000
Income tax and Medicare $7,306
15% pension tax offset $1,800
Net income $41,700

His retirement savings are then helped by the addition of his salary sacrifice contributions and the fact that he pays no tax on the investment earnings in his pension. In fact, he can increase his retirement balance at age 65 by over $45,000 and his potential minimum pension payment at that time by over $2,200 each year.

Retirement balance1 at 65 $538,713
Minimum pension on this balance $26,940

Summary

Option       Retirement balance1 at 65 Minimum pension on this balance
Work full-time and make no extra super contributions       $493,930 $24,700
Work full-time until 65 and Implement a TTR       $538,713 $26,940

 

1 Assumptions: Earning 7.7% pa after fees and before taxes with inflation at 3%. Using 2013–14 income tax rates. Pension is paid as an allocated pension. Superannuation guarantee contributions are 9.25% of gross salary in year 1, increasing to 12% by year 7, before any salary sacrifice. All superannuation contributions and pension payments are made regularly throughout the year. A change to any of the assumptions and variables can provide significantly different results. This is for illustrative purposes only, your circumstances have not been taken into account.