Even if you have built a valuable business, a sizeable superannuation balance, or other assets, transitioning to retirement is a big step.
We are living longer, meaning your superannuation and other assets may need to last for thirty, even forty, years.
Maximising your superannuation balance is key to a rich retirement. But just as importantly, you need to work out what retirement looks like for you. That way you can build a plan and take action now to make sure you have the kind of retirement you want.
You should start planning your retirement as early as possible. This article takes you through the steps to creating an effective transition to retirement plan.
The steps to effectively transition to retirement
Retirement is about more than money. Many people don’t have any idea what they want their retirement to look like. They simply stop working or operating their businesses and then try to find a hobby to fill in the days. How do you know how much money you need to retire if you don’t know what you want to be doing?
Each of these four steps (or ‘levers’) is important. When we help build a retirement plan for clients, they may need to pull different levers to get the retirement outcome they are looking for.
Step 1: Work out what retirement looks like
Determining purpose rather than just making a list of hobbies is an effective way to plan for retirement.
If you own a business, will you still want to work in it in some capacity? If you work for someone else, do you want to start reducing hours rather than stopping work altogether.
Do you want to be involved in the business community or general community by being a paid or unpaid member of boards or committees?
Will your partner still be working? Will you have family or carer responsibilities? Where will you live?
Is travel on your agenda or do you want more time for an artistic or sporting passion, or both? What legacy do you want to leave and how philanthropic do you want to be?
Once you have an idea of what your retirement will look like, you can focus on the financials.
Step 2: Work out when you want your retirement to start
Some people want to retire as early as possible. Some have a specific age in mind. Some want to continue working in some capacity for as long as possible, but with reduced hours.
The concept of retirement is changing and nowadays is less about working to a certain age and then stopping “cold turkey”. We are finding some form of work is helping to provide a purpose for people and then working out how this is successfully integrated with the other things they want to do to have a fulfilling life.
Still working in some capacity can help bring forward the date that you start “working because you want to not because you have to”.
For example, if you still work and earn $20,000 per year that could be the equivalent of the interest earned on over $500,000 (assuming interest rates of 3.5%). How long would you need to work full time to build that same level of savings?
Step 3: Work out how much money you need to retire and how you will get there
Understanding where you are spending your money is crucial at any stage of life, especially when it comes to retirement. You need to know how your spending needs will change so you can work out your annual desired income.
With that figure in mind, how will you get it?
The less tax you pay when building your wealth means more of your money is working for you and benefiting from compound interest, helping to grow the amount of your wealth. Likewise when you are drawing on your assets, the less tax you pay means the lower the amount of your assets you have to be drawing and this helps extend the life of your assets.
With this in mind, superannuation is one of the most tax effective ways to build wealth and also the most tax effective place to hold your assets when you are drawing a regular amount from it. You should have strategies to boost your super balance well before you retire, such as making voluntary super contributions. The way you make these contributions – concessional (before tax) contributions (generally via salary sacrifice) or non-concessional (after tax) contributions, have different rules and tax implications.
There are different ways to access your superannuation once you retire – as an income stream, a lump sum, or a combination of both. You can also tax effectively access some of your superannuation while you are still working – generally referred to as Transition to Retirement pensions. These have different rules and tax implications too.
Read our article on the transition to retirement rules and beneficial tax advantages here.
Step 4: Work out what return you need to achieve your retirement income and how much risk you are prepared to take to get there
Sometimes it is clear the income people need to live the retirement they want will not be available unless they change the way their assets are invested or managed, which could mean a change in their level of risk or even considering moving to a self managed super fund (SMSF).
More growth oriented super and investment strategies generally carry more risk. Knowing what risk you are prepared to take will help you to pull this lever or go back and make changes to your retirement activities and plans.
Get expert help with planning your transition to retirement
A fulfilling retirement is different for everyone. An experienced wealth manager can take you through these steps and help you ask the right questions to create the right retirement strategy for you.
They also understand the ever-changing rules and tax implications regarding transition to retirement, superannuation balance boosting and other wealth creation strategies.
Pitcher Partners’ private client advisors are experienced and they listen. They work with other team members across all elements of retirement strategy – wealth creation, investment and growth, budgeting and cashflow, risk management, superannuation, retirement planning, estate planning, and tax and business advisory accounting.
Have a question or need help with your transition to retirement?
We love questions. If you want to know more about Pitcher Partners Newcastle and Hunter’s private business and family advisory services or private wealth management services please contact us.
Matt Kerr is a Partner and Private Client Advisor at Pitcher Partners Newcastle and Hunter. A many of many talents, Matt is a Chartered Accountant specialising in financial planning as well as a Specialist SMSF Adviser and a Certified Financial Planner. He loves listening to people’s stories and appreciates that everyone’s story is different. Matt enjoys allaying people’s financial concerns so they can focus on their hopes and dreams.
