When is the best time to retire?— by Noel Whittaker
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Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: [email protected]
When is the best time to retire? It’s a common question, but there is no one-size-fits-all answer – so much depends on personal circumstances. However, there is a trend to keep working longer before retirement, and for most people, that’s a good decision. A major factor in retirement happiness is how well you have prepared for it: many people who retire with little forethought end up unhappy. Also, some are still facing the prospect of a post-retirement mortgage or feel they don’t have enough funds to live well for the rest of their lives.
Two of the main ingredients for retirement happiness are a good social network and a sense of purpose. This is why gradually winding down your work can be such a good strategy. It gives you a chance to get used to what your new life could be and allows compounding to work its magic on your superannuation.
When is the best time to retire? Image Credit: Shutterstock
It's important to understand the way compounding works: your super balance will grow exponentially if you can give it more time to grow. Think about somebody aged 60, earning $100,000 a year, and who has $500,000 in Super. According to the Super Contributions Calculator on my website, the simple strategy of working till 65 would see their super increase to $770,000 if their fund earned 7% per annum. Keep it up till age 70, and their superannuation should be $1.15 million.
Continuing to work – even part-time – can save you from drawing on your super too early. There’s also a strategy called a ‘transition to retirement’ pension, which enables you to draw down from your super while you are still working. I’ll discuss that in depth next week, as it’s a column on its own.
There are also opportunities to substantially reduce capital gains tax as you get older and continue to work because you can make tax-deductible contributions till age 75 if you can pass the work test. It’s a simple test – you only have to work for 40 hours in 30 consecutive days in the year you make the contribution.
Case study: Tom and Margaret are 73 and have gradually been reducing their working hours. They are now effectively on-call casuals earning about $20,000 each. He has $600,000 in super, and she has $200,000. They are thinking about selling a property, which will trigger a $400,000 capital gain. To use catch-up contributions, their balances on June 30 must be under $500,000 each. That’s easily achieved.
Tom withdraws $200,000 from his super before 30 June and contributes it to Margaret’s super as a non-concessional contribution, on which there is no entry tax. Their super balances are now $400,000 each, and they will both be eligible to make catch-up contributions. If their super was more substantial, they could make bigger withdrawals and park the surplus money in their bank accounts until the financial year ended. It could then be re-contributed to super, as long as Jack and Margaret are under 75.
After allowing for some small employer contributions over the last three years, they should be eligible to make around $100,000 each in catch-up contributions, plus an extra $27,000 in the current year. Because they have owned the property for over 12 months, they are entitled to the 50% discount, which makes the total assessable gain $200,000 or $100,000 a person. After discussing the strategy with their adviser, they make tax-deductible contributions of $100,000 each. Using the catch-up contribution strategy has eliminated the capital gains tax.
As you can see, working past 65 can have substantial financial advantages as well as health and well-being benefits. Obviously, good planning is essential to make it work for you.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Always seek professional advice that takes into account your personal circumstances before making any financial decisions.
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