When retirement is looming, or you are thinking about cutting back your working hours, reassessing your income and expenses is important.
A Transition to Retirement Income Stream (TTRIS) can be useful and alleviate some of the stress associated with the transition from working life to retirement. It lets you tap into part of your super while you’re still working, which makes it easier to keep the cash flowing as you ease into retirement. For high-income earners, it can also be used strategically to reduce tax and boost super savings.
Planning really does go a long way in setting yourself up for a stress-free and enjoyable retirement.
Like most superannuation strategies, the rules around being eligible, tax, contribution limits and government benefits can be a real minefield. There are also some pretty useful tools, such as insurance for risk management and budgeting calculators, that can help with financial planning and retirement decisions. Here’s a practical step-by-step guide to help you understand how it works and whether it’s a good fit for you.
Retirement Planning
Retirement planning is the foundation of building a secure financial future. It’s about more than just stashing the cash; it’s about creating a strategy that supports your lifestyle and your goals when you finally do retire. Whether you’re just starting to think about retirement or you’re already well down the track, having a clear plan in place can make all the difference.
A good financial advisor can offer you some real guidance and advice that’s tailored to your unique situation. They can help you figure out how much retirement income you’ll need, how the age pension and other government benefits might fit into your plan, and what steps you can take now to set yourself up for success.
Retirement planning is all about taking into account your current financial situation, your long-term financial goals, and what will work best for your needs. By taking the time to plan ahead, you can feel confident that you’re making informed decisions about your future and that you’re going to have access to the benefits and income you need in retirement.
Getting a Grip on Your Finances
The first step in any successful retirement plan is to get a clear picture of where you stand financially. That means taking a close look at your income, expenses, assets, and debts. Consider everything from your regular pay and investment accounts to your super fund balance and any outstanding mortgage payments.
A financial advisor can help you review your finances and give you some practical insights to help guide your next steps. You need to think about your investment goals, how much risk you’re comfortable taking on, and how much money you’ll need to support your desired lifestyle in retirement. By getting a good understanding of your financial situation, you can create a plan that’s tailored to your needs and helps you get the most out of your money as you move towards retirement.
What is a Transition to Retirement Income Stream?
A TTRIS lets you move part of your super from an accumulation super account into a pension account once you’ve reached your preservation age (currently 60 for anyone born after 30 June 1964). You can start tapping into your super when you reach your preservation age, which is between 55 and 60, depending on your birth date.
From there, you can draw a regular income from your super while you’re still working. Some people might also consider taking a lump sum from their super account, but that’s just one of several options available.
This can help you:
- Reduce your working hours while keeping your income intact
- Implement tax-effective salary sacrifice strategies
- Smooth your transition into full retirement
10 Steps to Setting Up a TTRIS
1. Check if You’re Eligible
To start a TTRIS you need to have reached your preservation age. For most Aussies that’s 60 these days.
2. Get Your Strategy Sorted
Before you start, be clear on what you want to achieve: Do you want to reduce your work hours but keep your income? Or are you looking to salary sacrifice into super while drawing a pension to offset reduced take-home pay?
Are you thinking of starting a business as part of your financial planning goals?
Everyone’s retirement plan is going to be different, depending on their priorities and lifestyle aspirations. What’s important is that you decide on your strategy based on your unique goals, whether you want to manage the process yourself or seek some expert advice.
Tax strategy can be pretty effective for individuals earning between $45,000 and $250,000 per year, where salary sacrificed contributions are taxed at 15% within super (up to concessional contribution limits).
A clear objective will help you figure out whether a TTRIS makes sense for you.
3. Understand Minimum and Maximum Withdrawals
When you start a TTRIS:
- A portion of your super moves into a pension account
- You need to withdraw between 4% (minimum) and 10% (maximum) of that pension balance each financial year
- Minimum withdrawal percentage might increase as you get older.
It’s worth understanding different contribution types, as it can affect how you manage your withdrawals and shape your overall retirement strategy.
4. Know What Tax Looks Like
If you’re 60 or over:
- TTRIS payments are generally tax-free – although there are a few exceptions
- Your earnings within the pension account will be taxed at 15%
- Once you reach age 65 or fully retire, the pension will likely convert to a standard account-based pension, and the tax treatment of earnings might change in some way.
5. Keep Your Accumulation Account Afloat
Your employer can’t put Super Guarantee contributions into a pension account.
You’ll probably want to leave a bit of a balance in your accumulation account so you can keep getting employer contributions while you’re still working. You and your employer can both add some money into the accumulation account – that way, you can keep adding to your retirement savings as you go along.
6. Check Your Insurance Inside Super
If you’ve got life or disability insurance within super, the premiums are probably being deducted from your accumulation account. Make sure you’re not going to get caught out with a lack of funds to cover the premiums going forward.
While you’re at it, you should probably review your personal insurance needs as part of your overall retirement planning, as changes in your super accounts or personal circumstances could affect the level of cover you need.
7. Think About How it Affects Government Benefits
For many people, government benefits like the Age Pension are an important part of their retirement income – but it all depends on your individual circumstances.
Starting a TTRIS might affect:
- Your eligibility for a part Age Pension
- Other government benefits (and possibly even those of your partner, too)
You need to keep the bigger picture in mind when deciding whether or not to go down this path.
8. Check the Rules with Your Super Fund
Every fund is different, so you’ll need to check on the specifics of:
- The application process
- Minimum balance requirements
- Fees
- ID requirements
If you’re running a self-managed super fund (SMSF), you’ll also need to make sure you’re meeting all the trustee obligations and record-keeping requirements.
9. Decide on Your Payment Schedule
Once you’ve got your TTRIS up and running, you can choose:
Your annual withdrawal amount (between 4% and 10%) and how often you want to receive payments – monthly, quarterly or otherwise. This allows you to tailor the cash flow to suit your lifestyle needs.
10. Keep All the Paperwork Together
Make sure you keep copies of things like:
Your application, pension statements and annual tax documents. If you’re running an SMSF, you’ll need to keep extra compliance documents as well.
Managing Debt and Expenses – a BIG Part of Retirement Planning
Managing your debt and expenses is crucial when it comes to planning for retirement. As you get ready to retire, it’s a good idea to create a budget that takes into account your income, spending and any outstanding debts. This way, you can make sure you’re saving enough for the future while still covering your current needs.
Consider cutting down on high-interest debts, cutting back on unnecessary expenses, and finding ways to boost your income. A financial planner can help you come up with a practical plan to manage your finances, so you can stick to your retirement strategy. By keeping a lid on your debt and expenses, you’ll be in a great position to enjoy a comfortable and secure retirement.
Estate Planning – More Than Just a Will
Estate planning is a key part of your overall retirement strategy. It’s about making sure your assets are looked after and distributed the way you want them to be – which gives you peace of mind and looks after your loved ones. This might mean creating a will, setting up a power of attorney, or establishing a trust to manage your assets.
A financial adviser can give you expert advice on how to develop an estate plan that fits your goals and circumstances. By thinking about your legacy as part of your retirement planning, you can make sure your assets are managed in the best possible way, and your family is looked after in the future. Estate planning is not just about what happens after you’re gone – it’s about making wise decisions now to protect your financial interests and those of your loved ones.
Don’t Set and Forget – Keep Reviewing Your Plan
A TTRIS is not a one-time decision. Your work situation, tax status, super balance, and retirement plans will likely change over time.
A solid financial plan needs to be reviewed every now and then to make sure it still aligns with your goals. Getting some advice from a qualified professional can help ensure your plan stays on track.
When you fully retire or turn 65, your TTRIS will usually need to convert to a standard account-based pension. Regular reviews will keep your plan aligned with your goals.
Investing in Growth Assets – A Key Part of Maximising Your Superannuation Portfolio
When it comes to giving your superannuation portfolio a boost, investing in growth assets is a pretty important thing to do – both before and during retirement. But before you can start thinking about how you’re going to live out your golden years in style, you first need to think about what you want to do with your retirement. What kind of lifestyle do you want to have? And just how much is that going to set you back? To live the sort of life in retirement that you are used to, you might need to budget around $54,240 a year if you are single or around $76,505 a year if you are a couple. And here’s a rough guide to go by – generally speaking, most people need about two-thirds of their pre-retirement income just to keep up with the same standard of living that they’ve always known. But one thing to watch out for is that the first few years after you retire are always the ones when you spend the most – all those years of saving up for that dream holiday or house you’ve always wanted are finally yours for the taking. And of course, your spending habits when you’re working and your spending habits when you’re retired are unlikely to be the same – some expenses will disappear while others will just keep on growing.
So how do you plan on making ends meet in retirement? Well, the good news is that the cash you need will likely come from a mix of different sources such as your super fund, your investments, your savings, your bank account and maybe even a bit of an inheritance. And while that might sound like a dream come true, it’s worth remembering that there are some potential downsides to consider:
- Reduced long-term capital growth
- Changes in tax treatment
- Possible impacts on Age Pension entitlements
Your Options
An account-based pension lets you get a regular income when you retire from work, based on how much you’ve saved in your super fund. Or a transition to retirement pension lets you get some of your super via regular payments, once you’re at least your preservation age.
The age you retire isn’t set in stone – you can retire whenever you want, based on all sorts of personal factors
And of course, when you’re planning for retirement, it’s also essential to think about things like your housing costs, travel and health.
Your Financial Plan
Your financial plan should include all sorts of key elements like a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy and an estate plan. A financial plan is a document that outlines your current financial situation, your goals and the strategies you need to achieve those goals. It’s supposed to help you get the most out of your money and reach your long term goals – like investing, sending your kids to college, buying a bigger house, leaving a legacy or just enjoying your retirement in style.
Time For A Chat
If you’re thinking of cutting back on work hours or you want to explore new ways of structuring your pre-retirement income, then get in touch with Insight Wealth today.