Why 'transition to retirement' is the best-kept secret

In this article:

Yellow Brick Road's Mark Bouris talks about how transition to retirement (TTR) is the best-kept secret in super

When people talk about superannuation they usually focus on two aspects: accumulation, when you put money away and let the nest egg grow; and draw down, when you're in retirement and living on savings.

These are both crucial. But once you get into your 50s, there's another subject worth thinking about: transition to retirement (TTR).

By using TTR you pay less tax than a full-time working person and you're still allowed to work.

It's a government policy that allows the benefits of both working and using your super, without totally losing the advantages of either.

One person might turn 55 – the age when most Australians can first take their super – and want to retire. They draw down on their superannuation and become a retired person.

Another person might work into their 70s because they like working, enjoy using their skills and they like the income.

TTR recognises that there are many scenarios between these two extremes. So under TTR you can reach 55, draw down some of your super into a qualifying pension product, and still be working and contributing to super.

Why would you do this?

Here's one reason. Your super is smaller than you want, so you draw down some of it (there are limits) into a pension product, and use this to supplement your income while you salary-sacrifice your working income into super.

This means you are supplementing your income from a super account based pension, which attracts a 15 per cent tax offset (against your marginal tax rate) and you boost your overall super balance via your employer superannuation guarantee and salary sacrifice contributions (which are only taxed at 15 per cent). Thus providing a net benefit to your long term retirement nest egg.

By using TTR you pay less tax than a full-time working person and you're still allowed to work.

Here's another reason. You may want to work, but not 50 hours a week. So you can phase out your working hours while using some super to cover living expenses and boost your super at a low tax rate.

The third reason you might use TTR? By living on your super for a few years, you not only have the chance to boost your super with salary sacrificing, but you can use this time to reduce debts before retirement.

The nature of TTR is that it allows flexibility in work-retirement arrangements, and those arrangements will vary from person to person.

And where there is flexibility there can be confusion.

I don't think any Australian should ignore transition to retirement, because it's a really good system. But you have to understand it and you must plan for it.

My first recommendation is to seek advice. There are many levels of advisers – you should sit down with one for at least an hour and talk about your options.

Secondly, plan early. Because TTR is a flexible, individual-driven system, it allows you to customise your retirement strategy. But for TTR to be properly customised to you, it should be integrated into financial planning and that means preparing for it.

Lastly, make sure you know your larger plan, not just for super but for life in retirement.

When you understand how you really want to live, you can see benefits of getting there with less tax and a bigger super balance.

Good luck.

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