One of the most significant events in our lives will be the transition to retirement, or if you want to think of it another way – switching from work to (hopefully) permanent leisure.
With Australians spending over 40 years in the workforce, that transition can be incredibly daunting, especially ensuring there’s sufficient funds for retirement.
So over the next two weeks, I’ll show the implications of taxation and inflation on retirement.
Take George, 60, who has retired from the mining services sector with a substantial superannuation balance of $1.1 million, he has the options of a lump sum or converting to an income stream such as an account based pension.
Despite his large balance, George hasn’t explored his options and wants to withdraw his superannuation as a lump sum, which under current legislation is tax free, as George is over 60.
George, and his wife Katrina, require $65,000 per annum for their retirement lifestyle; however they’re concerned about the security of their lump sum, so chose term deposits earning 6% p.a.
While considering the security of the lump sum, George didn’t consider their long term income needs and how taxes and inflation could erode that.
If George and Katrina invested in term deposits under joint names, they would receive $60,170 in the first year after tax – not sufficient to meet their income requirements unless they draw capital.
Conversely, had George converted the $1.1 Million to an account based pension and invested in fixed interest investments providing a net return of 6%, the net return would be $66,000.
The earnings they’d derive via an account based pension are tax free and would provide an extra $5,830.
Taxation is just one hurdle, so tune in next week to see how George and Katrina’s capital fairs against inflation, which will be one of their worst enemies.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s top financial adviser. We think we’re the best financial advisers in Tasmania.
