If you’re thinking about retiring in the next 5 years, it’s likely that you’ll need to make some key changes, either now or over the next few years. What specific changes are needed, depends entirely on your financial situation. However, there are several common areas that everyone approaching retirement should consider, which I discuss in this blog. This commentary primarily applies to self-funded retirees – those who are not expected to receive any Centrelink benefits.
Reset interest-only terms
If you have investment loans or mortgages, it’s worth considering whether resetting your loan terms makes sense for you. By doing so, you could secure a new 5-year interest-only period. Most lenders allow borrowers to roll over onto a second 5-year interest-only term after the first expires, without needing to reapply or prove eligibility again. This means that if you plan to retire at 60, for example, you can likely keep your loans on interest-only terms until around age 70.
In some cases, it may be necessary to refinance with a new lender to fully reset your loan terms. If that’s required, I recommend completing the refinance 6 months before notifying your employer of your retirement. Generally, I prefer loan repayments to be structured as interest only for retirees as it provides greater flexibility.
While refinancing after retirement is possible, it will depend on factors like your level of debt and income sources, such as superannuation pensions. However, I prefer to take a conservative approach and ensure a client’s loans are sorted well before retirement. It provides peace of mind.
Consider reducing or cancelling insurance cover
Income protection, life, and TPD insurance are essential during our working years because our ability to earn an income is critical to our retirement strategy. However, as we get closer to retirement, we ideally achieve a higher level of financial independence. At this stage, we should have sufficient assets to fund our retirement, meaning our plan is no longer dependent on continuing to work to produce surplus cash flow. This reduced reliance on earned income means we may need less personal insurance coverage, or perhaps none.
For income protection insurance specifically, the main risk we aim to cover is long-term incapacity. For example, being unable to work for 10 years would have significant financial consequences and negatively impact our ability to build wealth. However, as we near retirement, with only a few years left in the workforce, this risk diminishes. Therefore, it often makes sense to reduce or even cancel income protection and TPD insurance altogether as retirement approaches.
The same principle applies to life insurance. The key question to ask is whether your surviving spouse would have enough financial resources to maintain their lifestyle if you were no longer around. If the answer is yes, then life insurance may no longer be necessary.
Review your banking
Along with reviewing your mortgages, it’s worth considering whether there’s an opportunity to make other adjustments to your banking arrangements. For instance, you might want to replace or upgrade your existing credit cards, especially if you anticipate travelling more often. It’s much easier to do this while you’re still working, as securing a new credit card can become more challenging after you’ve retired.
Do you expect to realise a capital gain?
If you expect to trigger a CGT event soon, such as selling an investment property, it’s often wise to delay the sale until after you have retired, if possible. This is because incurring a CGT liability in a year with little or no taxable income can result in significant tax savings. For example, you could save over $33,862 in tax compared to selling during a year when you are subject to the highest marginal tax rate.
Additionally, if you anticipate a CGT liability in the first year or two of retirement and your superannuation balance is expected to be below $500,000, it’s worth considering your concessional contributions strategy. In the five years leading up to the CGT event, you might choose to minimise concessional contributions to preserve your eligibility to make carry-forward contributions. This approach allows you to make tax-deductible carry-forward concessional contributions in the year you incur a CGT liability, helping to offset or reduce the tax you may pay.
Carefully consider your retirement date
If you have a lot of long service leave and annual leave accrued, you should consider when you will retire, as this income will be paid to you on the date of retirement. In this situation, the most economical retirement date would be 1 July.
If you don’t expect a substantial payout of leave, then you might be best retiring at the end of the calendar year so that your final 12 months is spread across two tax years.
Make sure your superannuation is ready for retirement
As you approach retirement, your financial position and risk profile often shift, making capital preservation a higher priority than maximising investment returns. This is why it’s crucial to review how your superannuation is invested and assess whether a more conservative asset allocation might be appropriate for you.
The Global Financial Crisis, which happened 16–17 years ago, serves as a valuable lesson. Many individuals were over-invested in share markets, which fell by more than 50% and took more than 5 years to recover. As a result, many people had to delay their retirement plans. This highlights the importance of adopting a more conservative asset allocation if you are nearing retirement and unable to tolerate this level of market volatility.
In addition, if your super is held in a wrap platform or SMSF, you should also consider whether your investments provide sufficient liquidity to fund regular pension payments. Ensuring your fund can support your income needs in retirement is just as important as managing market risk.
Super re-contribution strategy
If you are aged 60 or older and have a high taxable portion in your super balance, or if the balances between you and your spouse are uneven, a re-contribution strategy can be beneficial.
This strategy involves commencing a Transition to Retirement (TTR) pension, which allows you to withdraw up to 10% of your super balance each year, regardless of whether you are working. These withdrawals are completely tax-free after age 60. You can then recontribute the withdrawn funds back into your super or into your spouse’s super account.
- Recontributing to your spouse’s super: This can help even out the balances between you and your spouse. By doing so, you increase the likelihood of both of you staying below the Transfer Balance Cap (currently $1.9 million). Staying under this cap means all earnings in your pension accounts remain tax-free.
- Recontributing to your own super: This increases the tax-free portion of your super balance. A super balance consists of two components: tax-free and taxable. If your super is bequeathed to a non-financial dependent after your death (such as an adult child), only the taxable component is taxed at 17% (including Medicare Levy). By using a recontribution strategy, you effectively convert taxable super into tax-free super, reducing potential tax liabilities for your beneficiaries.
This strategy is a useful tool for managing tax efficiency both during your lifetime and when passing on wealth to your beneficiaries.
Perhaps a staged transition into retirement is a better fit?
Many of my clients don’t expect to stop working completely when they retire. Instead, they plan to scale back and work on a part-time basis. This gradual approach offers two key benefits.
Firstly, earning an income in retirement can be very valuable. It helps delay or reduce the need to draw from your capital, allowing your investments to continue growing. It can have a significantly positive compounding impact.
Secondly, there are potential mental health benefits as discussed in this recent article in the AFR. In fact, a UK study found the likelihood of experiencing clinical depression during the first year of retirement was 40%, significantly higher than the usual 28%. Continuing to work helps maintain social connections, provides opportunities to learn new skills, and allows us to contribute to something larger than ourselves which, gives us a sense of purpose.
It’s best to get personalised advice
I’ve covered some of the common factors we consider when clients approach retirement. However, there may be other important aspects specific to your situation that I haven’t addressed here. That’s why it’s important to seek personalised advice from a trusted professional who can tailor advice to your needs.
Note: If you are close to or below the Centrelink income and asset test thresholds, there may be several other strategies you can explore to maximise your eligibility for the government’s aged pension and other benefits. This blog focuses on self-funded retirees only.
