During the past two decades, Australians have been able to rely on the so-called ‘Three Pillars of Retirement Funding’. These include the age pension funded by the Federal Government, compulsory superannuation and voluntary savings.
However, a recent ‘Household Capital: Your Life Choices’ survey, published by research house MorningStar, showed 85 per cent of all retiree respondents are unaware of these three potential sources of income through retirement.
This is significant given that preparation for retirement should start at least ten years before your planned retirement date to optimise your financial situation.
But what exactly does that all mean, and why?
1. Age Pension
The age pension is a fantastic safety net for all Australians, providing them with a regular, if modest, income throughout their retirement. (Age pension – Link - Age Pension - Services Australia)
Most retirees understand the age pension is asset-tested and income-tested, is indexed for inflation and has no risk associated with it.
The more investment assets you own, the smaller your pension entitlements will become until you are not eligible for any age benefits.
2. Superannuation
Superannuation still remains a central pillar of retirement planning, as once you have retired and commence paying a private retirement pension from your superannuation account all the assets supporting that pension, in terms of capital gains and income, become tax-free. The income paid to you from your super account when you are over the age of 60 is also tax-free. These private retirement pensions provides a great retirement funding structure allowing you to retain the benefit of your investment balance.
The strict rules around how much you can contribute to superannuation make planning ahead necessary in order to maximise this opportunity.
Most Australians are familiar with the superannuation contributions their employer makes on their behalf, and some understand what is involved with salary sacrificing and how this can be used to reduce their annual tax bill. There is also an opportunity to contribute up to an extra $110,000 annually to super with after-tax dollars. Link - Non-concessional contributions (mlc.com.au)
If you downsize your family home after age 55, they can contribute $300,000 over and above their other contribution limits. (downsizer contributions – Link - Downsizer contributions (mlc.com.au)
3. Non superannuation investments
While assets such as rental properties and share portfolios help support retirement income needs they can have issues around taxation and liquidity. Utilising the superannuation environment can help with these issues, however without adequate planning in the years leading up to retirement, the contribution limits may result in obstacles to increasing superannuation and maximising the tax free benefits in retirement.
As a result, it has never been more important to plan for your retirement as early as possible and obtain sound financial advice on how to structure your finances in retirement, as the penalties for getting it wrong can be significant.