Transition to Retirement, we often get asked if this strategy will work for an individual who wishes to use this strategy to boost their Superannuation benefits in retirement.
Whilst it must be remembered that the Transition to Retirement strategy has many uses, there are some simple fundamentals which will save you a lot of time and money.
It is true that anyone can ease themselves into retirement (once you are 55 or older) by using some of your Superannuation benefits to offset lower incomes as a result of reduced hours worked. As an example, let’s say you have always worked 5 days a week and would like to cut back to 3 days. Your budget requirements are such that you really need a minimum income equal to 4 days of work. Cutting back to 3 days just won’t give you enough income but you really do want to reduce the hours spent at your job. Here is where a Transition to Retirement strategy helps (within the rules of Transition to Retirement). Subject to enough funds in your Superannuation account, you could quite easily establish a Pension account which will fund the lost day’s income. Thereby allowing you to reduce your working hours, whilst retaining sufficient income to continue living comfortably.
However, in my experience, it is rare that an individual wants to do this. The more typical use of a Transition to Retirement strategy is to use this opportunity to further boost your pre-tax Superannuation contributions to your retirement fund.
Put simply, if your current combined employer and salary sacrificed contributions are equal to the Maximum Deductible Contribution limits applicable to you, then there is no point in considering this strategy at all. After all, contributions in excess of your Maximum Deductible Contribution limits are taxed at the highest rate + Medicare.
A note on Maximum Deductible Contribution limits:
You may remember a time when you could contribute up to $100,000 per annum. This changed many years ago. For many years now, the maximum cap limit has been set at $25,000. Whilst there were rafts of proposed changes (which have been scrapped) the revised maximum cap is now $35,000 for those who are 50 or older in the 2014/2015 financial year. For those over the age of 60, the maximum contribution cap of $35,000 came into effect in the 2013/2014 financial year.
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