Planning for retirement: working backwards
By Christine Wolfsbauer (Senior Associate) and Peter Bobbin (Managing Principal) Argyle Lawyers
When attempting to "work backwards" for retirement planning, the first question must be: When do I want to retire? This decision will impact upon the measures you put in place to achieve the retirement you yearn for. Particularly in the context of superannuation, the age at which you retire will result in different outcomes.
What actually is “retirement”?
The modern approach to retirement appears to be one of a gradual phase out from ordinary working life. The gradual approach to retirement, particularly popular in professional roles, sees individuals gradually hand over responsibilities, possibly doing some time in a "consultant" capacity, before fully removing themselves from the workplace. For those that own their own business, the process may be even more drawn out as it requires coming to terms with really letting going of the reigns and entrusting your successors to take care of a life's work.
The Superannuation (Industry) Supervision Regulations 1994 defines "retirement" differently depending on the age of the person. In summary:
- If a person is less than 60 years of age but has reached "preservation age" (as defined by reference to the year you were born, for example, born before 1 July 1960 your preservation age is 55 years), retirement is when the person ceases gainful employment. The person must intend that the ceasing of gainful employment is permanent and final, in that they must intend to never again be gainfully employed.
- If a person is between 60 and 64, retirement can occur when the person ceases at least one gainful employment. They need not cease all gainful employment.
- At any age, if you permanently cease employment and intend to never again be gainfully employed, you will be "retired" for superannuation law purposes. Those that have not reached preservation age however will not be able to access their benefits.
The definition of "gainful employment" under superannuation law is broad enough to cover any activities undertaken by a person for which payment is received, regardless of the activities actually undertaken to receive it. For example, even activities which require little to no effort but for which payment is received will be considered gainful employment. However, superannuation law specifically provides that working up to 10 hours per week or only receiving payment as re-imbursement or allowance for incidental expenses will not constitute gainful employment.
So why is this important?
This article assumes that you will largely rely on your superannuation to fund your retirement. Accordingly, understanding exactly when you will be able to access your superannuation savings is imperative to planning for your retirement. If your retirement age is 65 or more, there is no problem with accessing your super from age 65, this is an all-encompassing condition of release for super.
If at your retirement you completely stop work and retire, there is no problem with accessing your super, you will have satisfied a retirement condition of release as noted above.
The potential problem arises if you are likely to take the gradual approach to retirement, you need to be mindful of what permanently terminating gainful employment requires so as to ensure you do not create an early access violation by accessing your superannuation benefits earlier than you are entitled. If the ATO is of the view that your gradual approach has not yet triggered a condition of release and you have called on your super believing you have, the ATO will treat your access as an early access violation with disastrous tax consequences.
If taking the gradual approach it is best to go overboard to prove the point of your super lawful retirement.
Once you understand the age at which you are able to access your superannuation benefits, you can then consider what your superannuation balance will need to look like to achieve the retirement you want.
How much do I need to retire comfortably?
A comfortable retirement of course means different things to different people. When considering how much you will need for your own retirement, it is important to bear in mind the recent changes to superannuation laws that place a limit of $1.6million that each person is able to apply to their tax-free pension accounts. If you consider that you will likely have more than $1.6million in your pension account then you should speak to your advisor now so ensure that your superannuation accounts are structured to achieve the most favourable position. If your pension accounts will exceed $1.6million the income on the excess will be taxed at 15%.
Accordingly, one approach may be to maintain certain amounts outside of superannuation so as to make use of the ordinary tax-free threshold available to all individual taxpayers.
If you consider that you would also like to access some form of social security payments in your retirement you should factor this into your retirement planning. Generally, social security payments are means tested and holding assets in trusts or companies for example will ordinarily be looked through. Generally planning to achieve access to social security will be at least a five year plan, in that the means tests will include anything you have given away in the last 5 years.
Members of employer or industry superannuation funds may also receive other entitlements under their Fund which upon retirement will need to be financed personally. These need to be taken into consideration in your retirement planning.
Other points to note
Those in senior positions or in circumstances where you are on-selling a business will have other "loose ends" that will need to be tidied up as part of the retiring process. For example, any personal guarantees will need to be dealt with and professional insurances will need to include run-off provisions.
It is never too early to start thinking about retirement planning. This can be as simple as just being aware of the key concepts and understanding what needs to be done as you get closer to retirement age. If you are still young it may mean that you consider salary sacrificing into your super to help achieve the level of retirement savings you think you will need. If you are closer to retirement age then it is time to ensure that you are well-versed in what your superannuation looks like and when you will be able to access it.
Originally published in EQUITY AUGUST 2017