Transitioning to Retirement

Case study: Making the transition to retirement

Judy is 55 years old and is currently working full time with no plans to change her employment arrangements. She wants to retire at 65. She has an annual salary of $50,000 and $300,000 in super. Assuming her 9.25% employer super contributions continue until she reaches 65, she’ll have around $493,930 in super by the time she retires, which will give her a minimum income of $24,700 pa in retirement.

After speaking to her financial adviser, Judy decides to implement a strategy that could significantly boost her retirement savings while having little impact on her day-to-day budget. She uses her $300,000 super balance to start a pre-retirement pension, drawing down the minimum payment allowed which is $12,000 a year. This gives Judy more income than she needs, so she arranges with her employer to make additional contributions to her super from her pre-tax salary under a salary sacrifice arrangement. Her adviser works out exactly how much she needs to contribute to super through salary sacrifice so that her after-tax income is unchanged.

Even though Judy is still receiving the same amount of after-tax income as before, by implementing this transition to retirement strategy, she is able to increase her super balance rather than reducing it, helping her build valuable additional retirement savings.

By using this strategy, Judy could end up with approximately $45,000 extra in her super fund by the time she turns 65. These extra funds could increase her minimum retirement income to around $26,940 pa.

Notes Source: Colonial First State. Assumptions: Earning 7.7% pa after fees and before taxes with inflation at 3%.Using 2012–13 income tax rates. Pension is paid as an allocated pension. Superannuation guarantee contributions are 9% of gross salary 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 case study is for illustrative purposes only.

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