Transition to Retirement

Transition-to-Retirement strategy

Transition to Retirement (TTR) is a retirement planning strategy for those over 55 and still in paid work.  With TTR you can access your super, and increase your super contributions, before you retire. TTR usually has substantial tax benefits, and can increase your wealth at retirement. However it does not work for all situations.

A Transition to Retirement strategy can give you an income stream with a 15% tax rebate. You can reduce your take-home employer income and increase your super through more salary sacrifice, while paying a lower tax rate, because you’re not taking your full salary as income.

TTR risks in a retirement planning portfolio.

Often the financial planning industry focuses solely on tax minimisation, but there are traps that can be wealth destroying.  You may end up worse off than when you started, saving on tax but also reducing wealth.

Our approach to TTR in retirement planning

There are limits to what you can put into your super and what you can pull out, and these have to match. The 4 variables to consider are:

• how much you already have in super
• how much you're putting in before TTR
• how much you’re currently earning
• your age

At Archimedes Financial Planning we look at your situation in more detail and work out if TTR is appropriate for you and if it will, what is the best combination of drawing on super and paying in super, given your income and age.  The approach is personalised to your situation and assesses the four variables above to find the best combination.

Here's a brief case study of a general TTR plan:

A person aged 55

• earns $100,000 pa and requires $53,000 pa living expenses
• has $300,000 in super and is currently salary sacrificing $30,000 pa
• accumulation super earns 6.8% pa

With a Transition-to-Retirement plan:

• starts TTR allocated pension earning 7.8% pa and paying $30,000 pa
• increases salary sacrifice to $67,000 pa which gives same net income as his current strategy

The results are shown in the chart below.

The Transition-to-Retirement strategy is projected to increase the person’s wealth by about $20,000 at age 60 or $65,000 at age 65.

At first glance it may seem obvious to start the Transition-to-Retirement strategy.

However, at Archimedes Financial Planning, we explore this decision in more depth, considering:

• what is the benefit if you stop work well before age 65?
• should the TTR allocated pension draw the minimum, maximum or some intermediate amount?
• what is the projected difference using different risk profiles?
• how does a TTR allocated pension affect superannuation preservation status?
• what is the effect of waiting to age 60 when payouts are tax-free?

Analysing these questions can throw a different light on the merits of starting a TTR pension.