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Making the most of your retirement: Understanding how transition to retirement works

Published 21 January 2024

Making the most of your retirement: Understanding how transition to retirement works

Entering into retirement can be both exciting and nerve-wracking. On one hand, you finally have all the free time in the world to do what you want, when you want. On the other hand, it can be difficult to adjust to a new lifestyle and to ensure your financial security for the years to come. And it is often moving from full-time work to semi or full retirement that is the hardest transition to make.

By strategically managing your transition from full-time work to retirement, you may be able to access your superannuation benefits while still working and receiving an income.

The main purpose of a Transition to Retirement (TTR) plan is to provide individuals with more flexibility and control over their retirement savings and cash flow - particularly as they approach retirement age.

A TTR strategy can be used in three ways:

  1. To increase your superannuation whilst you continue to work full-time
  2. To receive the same income but reduce your working hours
  3. To increase your income whilst continuing to work

Each of these options can assist you as you ease into retirement, but TTR strategies are not always appropriate for everyone.

Once you have reached preservation age, you may wish to continue working, and use a TTR Income Stream (TRIS) to access some of your super funds. This amount can be up to 10% of your account balance each year and may be paid as a lump sum or at regular designated periods. As you continue to work, you can continue to make contributions (or salary sacrifice to save tax) to your super account, whilst also accessing funds through your TRIS.

Case Study Example

Let’s assume: You are 60 years of age and wish to continue working for another 5 years. You earn $100,000 per annum which includes $9,909.91 of superannuation paid by your employer. Your income tax and Medicare levy would equal $21,548.08 per annum. Your ‘take home’ monthly pay would be $5,709.50. You have $500,000 in your superannuation fund.

By opting into a TTR strategy, you can continue working. Your employer will continue making superannuation contributions and you choose to salary sacrifice $15,000 into your super (not exceeding the annual cap of $27,500, so tax on contributions would be 15% - less than your marginal tax rate). You withdraw 2% of your $500,000 superannuation balance ($10,000 for the year).

In this scenario, your monthly income would be around $4,973.38 from your salary, plus $833.33 from your TRIS. You are still ‘taking home’ $5,806.66 as your income tax and Medicare levy has reduced to $16,885.92. You are also adding more to your superannuation by way of additional contributions.

You can apply the same methodology and work less hours for a reduced salary, thus transitioning into retirement.

Not for Everyone

The best retirement strategies are those which cater to an individual’s particular circumstances. A TTR/TRIS strategy may not be the best course to take for some, for example, if you have a low super balance or have other sources of income such as a rental income, you’ve already retired or close to retirement age or if you’re on a low marginal tax rate.

You should also consider the effect of drawing down your super and the impact a TTR strategy could have on any social security payments.

The Importance of Advice

A Transition to Retirement strategy can provide you with a much-needed boost to your retirement income without sacrificing your lifestyle or financial security. However, always seek professional advice before making any decisions about your retirement savings so that they can evaluate the full impact of your retirement strategy.

At Fiducian, we provide our clients with tailored solutions so contact us today to find out if a TTR strategy is advisable for you.