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Transition to Retirement

14/7/2013

1 Comment

 
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The smart way to ease into retirement

Nearing retirement and want to work part-time? Or are you thinking about a career change but worried about the drop in income?



If a better balance of work and lifestyle is what you want, the good news is that it may be possible under superannuation rules. Plus it can be a good way to reduce the amount of tax you are currently paying.

If you’re between the age of 55 and 65, you can potentially scale back your work hours and use your super to start a Transition to Retirement (TTR) pension – giving you an ongoing income stream, and all the flexibility and freedom that comes with additional cash flow.

How does it work?

In short, you can reduce your work hours and supplement the lost income with a TTR pension income stream that you draw down from your superannuation savings. This can potentially give you the same after-tax income as when you worked full-time.

There are two major advantages of this strategy:

  1. The investment earnings in a pension account are exempt from tax – compared to the 15% tax you pay inside a superannuation account. 
  2. The income you receive from the TTR pension is generally more tax-effective than your regular income:

          − If you’re between ages 55-60, any income you receive from super is taxed at your marginal tax                      rate. However, you receive 15% back in your income tax return each year.

         − After age 60, the income you receive from super is tax-free. 

In effect, commencing a TTR pension means you are changing the composition of your income, which may allow you to pay less tax overall – as demonstrated in the following case study.

Lifestyle Booster strategy

Janet, aged 58, is a retail assistant earning $50,000 p.a. ($42,203 after tax). She has a superannuation account balance of $240,000 (a 70% taxable component and 30% tax free component) and plans to fully retire from the workforce at age 65.

Her daughter has recently given birth to her first child and Janet is looking to reduce her work hours so she can help care for her grandchild when her daughter returns to work. Janet hopes to continue working three days a week, but she is concerned about meeting her living expenses if she reduces her working hours.

Janet’s financial adviser shows her that by commencing a TTR pension, she can still receive the same after-tax income as when she worked full-time – even after reducing her work hours.

To achieve this, Janet’s TTR pension supplements her reduced salary of $30,000 with a pension payment amount of $15,001 p.a. This gives Janet the same after-tax income of $42,203 p.a.

Lifestyle benefits

This strategy can be highly appealing to those wanting to ease into retirement. Rather than ‘downing tools’ altogether, it gives you the chance to become familiar with the shift in responsibilities and adjust gradually to retirement.

It will also be particularly helpful in situations where there is a lifestyle or personal need for part-time work, such as having to care for an elderly parent or taking care of the grandchildren. This gives you the time off to handle these issues and still work.

It is important to be aware that if you are working shorter hours and supplementing your income with money from your super, this could result in less super in retirement.

Speak to your financial adviser to ensure that a phase down strategy is appropriate for your needs and objectives before making any decision.


Source: One Path - www.onepath.com.au

1 Comment

The importance of financial planning 

14/7/2013

2 Comments

 
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A bright future and a bold ambition need the backing of a brilliant plan

Building a free and independent lifestyle needs more than just a drive to succeed and the skill to make it happen. It takes one of two other ingredients; good luck or good planning.

The dream to be rich, free and happy

We all have different definitions of success. For most of us it is the desire for financial independence, an aspiration to choose our own path in life and ultimately, a drive to achieve a sense of fulfillment and happiness.

Chances are you have already taken the right steps toward these goals:

  • through education
  • buying your first home
  • establishing yourself in a rewarding career or business
  • starting a family
  • implementing an investment plan, or
  • enjoying life experiences such as travel, sporting activities and entertaining friends.

It’s natural to assume that we can control our progress toward these and other goals through our motivation, hard work and perseverance…and often, if we are lucky - we do.


You are free to choose luck, and hope that a tragedy doesn’t strike and you won’t suffer from a serious illness or injury, or that unexpected death won’t disturb the secure and comfortable life you want for you and your family. But fortunately, you are also free to choose a more financially secure future.

Why not take the opportunity right now to explore your options and make a conscious choice about your future, rather than leaving it to chance?

No one plans to get sick, injured or to die prematurely, but you can plan to provide a cash cushion if you or your family are ever unfortunate enough to be affected by these events. It’s all about retaining control of your financial independence even if you lose the ability to earn a living through your own efforts.

Through effective planning and provision for events that threaten your life, you can safeguard the financial future for you and your family. It is within your control.

The four pillars of protection

You can effectively and economically immunise your financial future against these risks using a combination of four basic types of cover:

  1. Income protection insurance to provide a replacement monthly income if you are temporarily sick or injured.
  2. Critical illness insurance to provide a lump sum of cash if you are diagnosed with one of many specified medical conditions, such as cancer, multiple sclerosis and heart attack.
  3. Total and permanent disability insurance to provide a lump sum of cash if you become totally disabled and are unable to work ever again.
  4. Life insurance to provide a lump sum of cash upon death or terminal illness.
A combination of these insurances can give you the financial resources to maintain or adjust your lifestyle and ensure that you are able to care for yourself and your family with confidence and dignity.

Good economic sense

The advantage of owning personal insurance is that you can make relatively small payments and instantly create a huge pool of contingency capital and income. When you compare this concept to the alternatives, it represents a vastly superior economic proposition:

  • saving for such contingencies yourself may take years and you will only ever receive dollar for dollar plus any investment returns
  • relying on social security may only provide you with a fraction of the income you need or are accustomed to, and
  • dependence on relatives or friends would cost nothing, except maybe your dignity, but is unlikely to be a secure or sufficient long term source of income.

A skilled planning partner

Putting your protection plan together is best accomplished with the help of a professional insurance adviser who specialises in risk management. Working together can be a rewarding experience as you create security and protection around the financial future of those you love. It may be the most significant step toward financial freedom that you ever take.


Source: TAL Life Insurance - www.tal.com.au

2 Comments

    Author

    Sean Thomas - Financial planner 

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