What to consider when withdrawing your super early

As the COVID-19 virus took a sledgehammer to the economy, the federal government rapidly introduced a range of initiatives to help individuals who lost income as a result of the measures taken to control the virus.

One of those initiatives was to allow qualifying individuals access to a portion of their superannuation to help them meet their living costs. Withdrawals are tax free and don’t need to be included in tax returns. Most people can withdraw up to $10,000 in the 2019/2020 financial year and up to a further $10,000 in the 2020/2021 financial year.

For many people this early access to super will prove to be a financial lifesaver, but for others the short-term gain may lead to a significant dip in wealth at retirement. And the younger you are, the greater that impact on retirement is likely to be.

Alexander provides an example that many people will be able to relate to. He’s a 30-year-old hospitality worker, and due to the casual nature of his recent employment he is not eligible for the JobKeeper wage subsidy. He is eligible to apply for early release of his super under the COVID-19 provisions, however before going down this route he wants an idea of what the withdrawal will mean to his long-term situation.

Taking the max

Much depends, of course, on the future performance of his superannuation fund. However, if Alexander withdraws $20,000 over the two financial years, and if his super fund delivers a modest 3% per annum net return (after fees, tax and inflation), then by age pension age (67, if born from 1 January 1957), Alexander will have $39,700 less in retirement savings if he doesn’t make the withdrawal.

At a 4% net return, he will be $65,360 worse off if he makes the super withdrawal.

But that’s not the only disadvantage for Alexander. A smaller lump sum at retirement means a lower annual income. If Alexander draws down his super over a 20 year period, at a 3% net return, he will be around $2,670 worse off each year as a result of making the withdrawal. Over 20 years that adds up to a total loss of $53,375. At a 4% return, his youthful withdrawal will cost him over $96,000 by the time he reaches 87.

Reducing the risk

On the plus side, if Alexander is eligible for a part age pension when he retires, his smaller superannuation balance may see him receive a bigger age pension.

There are other things Alexander can do to reduce the financial consequences of accessing his super early. One is to only make the withdrawal if he absolutely has to. Or if he does make the withdrawal, to use the bare minimum and, when his employment situation improves, to contribute the remaining amount back to his super fund as a non-concessional contribution.

COVID-19 is adding further complexity to our financial lives, so before making decisions that may have a long-term impact, talk to your Bridges financial adviser.

Three things you may have forgotten to plan for in retirement

Retirement can be an exciting phase in your life. But all the recent changes to superannuation bring with them lifestyle and financial issues you need to be aware of as you plan your retirement.

Retirement means different things to different people. For some, it’s an opportunity to travel, to begin that project they’ve been putting off for years, or to just relax, spend time with the grandkids and dabble in their favourite hobbies. Retirement should be a time to relax and be free.

 

Plan smart for a stress-free retirement

Your retirement should be a time to free yourself from financial stress. Planning and good advice from a qualified financial adviser is the key to a trouble-free retirement.

If you’re considering retirement, there are issues you need to think about and plan for before you take the plunge. Here are three areas retirees commonly overlook in planning for their retirement:

 

  1. Have a re-contributions strategy

Our experience in talking to prospective retirees is that few have heard about a ‘re-contribution strategy’. So, we’d like to take this opportunity to explain what it is and provide some more detail.

Your superannuation entitlements comprise both taxable and tax-fee components. A re-contribution strategy is one where you withdraw your money from your superannuation account and re-contribute that cash back into your fund.

Why a re-contributions strategy may be important

Re-contributing all or part of your withdrawn funds back into your superannuation as a tax-free non-concessional contribution increases the level of tax-free funds in your superannuation account.

This reduces the tax payable on your superannuation pension if you dip into that pension while under 60 years of age. A re-contribution strategy can also lower the tax payable on benefits paid to your beneficiaries when you direct your superannuation benefit to your non-dependent beneficiaries following your death.

 

  1. Death nominations

A lot of retirees often forget death benefits are payable to your dependents or your estate from your superannuation fund upon your death.

There are four forms of death nominations which may be allowed by your superannuation fund.

You can make a binding death benefit nomination while you are alive. This is a written direction to your superannuation trustee establishing who you wish your superannuation death benefits to be distributed to.

Secondly, a reversionary nomination is where a superannuation fund member receiving an income stream nominates a beneficiary to whom the income stream will continue to be paid upon their death.

Thirdly, you can make a non-binding death benefit nomination guiding the trustee to whom you wish some or all of your superannuation death benefits is be paid to following your death.

Lastly, you may make a non-lapsing binding death benefit nomination directing your superannuation trustee to distribute some or all of your superannuation death benefits to your eligible beneficiaries or legal personal representative. This nomination remains in place unless you cancel or replace it with a fresh nomination or the superannuation trustee is aware your circumstances have substantially changed (e.g. you married, divorced or had a child).

Why a Death Benefit Nomination is important

If you don’t dictate how your superannuation death funds are to be distributed, the trustee of your fund has discretion who to pay your superannuation death benefit to in the event of your death.

 

  1. Ensuring your money will last and maximising Centrelink

Australia’s social security system is means tested. It is designed to act as a safety net. So, the higher your income or assets you have when you are assessed, the lower your Age Pension entitlements may be.

If your income or assets exceed the set cut off limits, you will not be eligible to an Age Pension at all. Hence Australians are expected to use more of our own savings to fund our retirement.

Currently, for every $10,000 of assets above the allowable Age Pension threshold your pension drops by $390 per year each if you’re member of a couple or $780 per year for singles.

Why ensuring your money lasts is important!

The more-heavy lifting your pension does, the less you’ll draw on your retirement savings. This is important as our increased life expectancies coupled with a turbulent investment environment make it challenging to ensure your retirement savings will go the distance.

 

Final observation

Planning your retirement can be complicated. As you can see from the above three issues, the various legislative frameworks are complex. While it pays to understand how retirement works, contact a qualified financial adviser to discuss your personal situation and retirement needs.

Renting in Retirement: Is it possible?

As record numbers of Australians transition into retirement, considering your cost of living and comparing it to your expected average annual retirement income is a crucial step in retirement planning. For many Australians transitioning into retirement, the increasing cost of housing continues to be a burden on people’s ability to pay off their property in their lifetime. This can lead to a few common scenarios — selling the property prior to retirement and renting, continuing to pay down the mortgage and leaving beneficiaries with an asset that has debt owing, or long-term renting due to lack of affordable properties on the market. Naturally, this is a stressful situation for anyone to think about, whether you’re about to retire or you’re a young adult watching your parents prepare for their retirement.

How much money do you need to retire comfortably in Australia?

According to the Association of Superannuation Funds of Australia (ASFA), there are two broad categories of lifestyle in retirement — comfortable or modest. A comfortable retirement affords people with a good car, top-tier private health insurance, dining out on regular occasions, travel, and the other lifestyle factors you enjoyed while working. In a modest retirement, you may be entitled to the Age Pension, but you’ll only be able to afford a basic lifestyle, with limited funds available for small luxuries.

To live a comfortable retirement, you need to have a nest egg of approximately $545,000 for single people, and $640,000 for a couple in super. These nest eggs would generate an income of $43,000 for single people and $61,000 for a couple.

For a modest retirement, you require a much smaller nest egg around $70,000 for single people and couples in super. This modest nest egg is all that’s needed for a modest retirement because the Age Pension and associated pension supplements, if eligible,  will may cover most of your living expenses.

How can renting affect your retirement income?

While these numbers help you understand what your nest egg should be before you retire and what you can expect your annual income to be, things become complicated if you don’t own your home. The ASFA’s calculations assume that retirees will own their property before retirement, therefore not needing to allocate money towards mortgage repayments or rent in the household budget. However, the Australian Bureau of Statistics (ABS) report that around 285,000 Australian households are renting in retirement. While renting can afford you the ability to live in a more desirable location than if you owned a property, the cost of your rent still needs to be factored into your retirement planning and therefore the numbers provided by ASFA need to be tweaked if you are renting in retirement.

Can you rent and afford a comfortable retirement?

Based on the ASFA’s calculations, if you live in Sydney retired couples and singles would need $1,166,000 or $1,045,000, respectively to afford a comfortable retirement lifestyle and rent. While this number may be slightly lower for other cities and regional centres where rental prices are lower, it provides a more realistic calculation of exactly how much your retirement nest egg should be if you’ll be renting retirement. Having a greater understanding of how you can structure your super funds in the accumulation and drawdown phases can help you be better prepared.

As with other passive investments, you need to ensure you’re not drawing down so much capital each year that your balance isn’t compounding at an adequate rate to provide you with enough retirement income for the rest of our life. For example, if the average return on your super balance is 9% per year, it is wise to drawdown 4% or less of your balance each year so you can maintain adequate funds throughout retirement, which may be longer than you think. A good financial adviser can work through the calculations based on your individual circumstances, factoring home ownership or rent and any Centrelink benefits you are entitled to, so you can live the retirement lifestyle you want without a fear of running out of money.

What are the alternatives to renting in retirement?

If you don’t own a home and you’re not keen on renting, then there are other options. Maybe you want the freedom of living in a motor home, setting up in a modern tiny home, basing yourself in a retirement village, securing granny flat rights, or, living on a cruise ship. While these options may not be for everyone, the very nature of retirement, can give you the flexibility to live a nomadic lifestyle with a smaller carbon footprint. If you’re interested in staying in one place, a retirement village or granny flat can provide you with that lifestyle.

In conclusion

There’s no one size fits all when it comes to your retirement dreams and your retirement finances. But, if you don’t own your home, you’ll need to factor the cost of rent into your retirement planning to ensure your nest egg and the annual income you’ll draw is enough to provide your desired retirement lifestyle.

Want to know more? Work through your options with one of our financial advisers.