Money
Retirement countdown: What you should be doing 10, 5 and 1 year out
With 10, 5, 1 years to go, this is Nicole Pedersen-McKinnon’s financial playbook for picking up the retirement preparation pace… and all the things you need to do to make it fabulous!
By Nicole Pedersen-McKinnon
At pretty much the same time in every Aussie’s life, they have a Eureka, penny-drop moment where wealth – or the frantic pursuit of more of it – takes centre stage.
That moment is usually age 50. (We could add, in the current environment, when markets fall.)
You might still be raising children and you’re probably still racing to repay a mortgage, but all of a sudden you gleefully (or maybe scarily) cast your mind forward to when you’re finally going to be able to get at your super.
This is at age 60 – or it is if you retire. Even if you don’t, you can access it at age 65.
So with 10 – and five and then 1 – years to go, this is your playbook for picking up the retirement preparation pace… and all the things you need to do to make it fabulous!
Countdown: 10 years to go…
1. Find your perfect number
How are you going to get where you need to go if you don’t know where that is?
Now that you’re getting serious about when you might stop work, step one is to figure out how much you will need to live on.
ASFA’s retirement standard, for example, suggests a comfortable lifestyle costs a single person $51,805 a year and a couple $73,077.
But forget the one-size-fits-all guestimates… How much a year will buy the lifestyle you aspire to? Give it some forensic thought.
Then the fabulous calculator at moneysmart.gov.au will show you the annual income you are on track for. (You can also see the lump sum that will generate that for you here.)
More ways to calculate your retirement here.
But don’t be daunted if the gap between the income you want and what you may get makes you gulp…
It’s just possible – having built your skills and experience over a lifetime – that you are at the height of your earnings power.
Plus, we are going to set a strategy to get you as close as possible to your perfect number and retirement ideal.
2. Smash down your mortgage
Every cookie-cutter calculation of the cost of retirement living out there, ASFA’s included, is predicated on you having paid off your mortgage and having no outlay for the roof over your head.
And in any case, this has to become one of your highest priorities (or does it?).
But do it smarter rather than harder.
With interest rates finally coming down, and probably fast due to global uncertainty, simply keeping your repayments the same is a free kick to kick debt.
But you can do better than that by refinancing to one of the more competitive new deals out there. Just this little bit of home-loan housekeeping could save you $108,740 in interest – money you don’t have to pay – if you refinance $400,000 from 6.5 percent to 5 percent.
And it’s when you do this but keep your repayments the same (what I call ‘up stumps but still stump up’) that your debt will start to drop dramatically.
This one is a ‘free’ move – ‘free’ because you are not paying a cent more than you are used to – and it will add $77, 964 to take your interest saving to $186,704… and get you out of debt almost 6 years early.
Then, cut your required repayment in half and pay them fortnightly for another simple but powerful boost that won’t cost much from your hip pocket… but will save $48,000 and shave 3.5 years off your loan.
It’s time to mobilise any savings for the mortgage too…
3. Redeploy your reserves
Have money in the bank while you still have a mortgage? Even a little? You are earning probably 4.5 percent max, from which you are losing tax at your marginal rate.
The far smarter idea, especially as you turn your attention to ditching debt, is to stick all such cash in an offset account attached to your mortgage.
Any money you hold in such an account is netted off your loan balance so this will save you the equivalent of your mortgage interest rate, which is likely as much as 2 percentage points more than the bank deposit rate.
And, because it’s only saving you that amount, there is no tax to pay.
This is also really clever debt reduction stuff: any money you keep in an offset can easily save you double that amount over the life of a loan and bring your mortgage-freedom date significantly forward… and remember you still have it at the end of that loan – you have just redeployed its location to reduce debt.
There are also easy super wins as you gear up to retire… strategies at both the high and lower income ends of the scale.
And you could exercise both as a couple if each of you fit into these categories.
4. Use the super boosters
Alongside your mortgage as a priority, of course, is your super. The retirement ideal is not just a house to live in but enough money to live on.
A super ‘co-contribution’ – every year – would help.
It means up to an extra $500 a year for someone who is earning less than $60,400 in 2024-25 (they must be working). All you need to do is contribute $1000 a year after tax for the freebie.
Then there is the spouse contribution. If one person earns less than $40,000 a year (they don’t have to be working), a $3,000 after-tax contribution by the other will net a $540 tax offset.
This bonus money could also be thrown into super.
Soak up the unused allowances
If disposable income has grown, each person could also mop up unused super concessional contributions – before tax ones – from the past 5 years. In the 2024-25 tax year, the 5-year overall figure is $137,500 that each could contribute and claim a deduction for (provided each super balance was under $500,000 at the end of last tax year).
(Just be aware of Division 293. This imposes an extra 15 percent tax on super contributions if your salary and your concessional super contributions total more than $250,000 in a financial year – it’s levied on any super above that. So you don’t want to go beyond this.)
Then there are non-concessional limits – after tax contributions – for any other money. You can contribute $120,000 a year after tax, and also bring forward 2 years to total $360,000 (provided your super balance was below the transfer balance cap of $1.9million at the end of the previous tax year).
If you’re part of a couple, that’s also each.
You can pay in more – and generate more too – in a circumstance that you might consider with 5 years to go.
And there are a few more smart strategies then…
Countdown: 5 years to go…
1. Factor in a downsize
Do you really want to retire with a big family home? To encourage a lower-maintenance, better-lifestyle swap, and to free up housing stock, the government allows you to pay $300,000 of sale proceeds of your principal private residence into your superannuation. That’s each.
You need to have lived in the home for 10 years to take advantage of it but there are surprisingly few other rules.
The $300,000 you can shelter doesn’t even impact your other superannuation limits or what you can otherwise pay in.
More on this: Don't sell your home until you understand the downsizer bonus
2. Super 60
If you keep working beyond 60, there’s a fantastic opportunity to recycle more money into your super by opening and drawing from a transition to retirement pension and salary sacrificing at the same time.
This is because the pension is tax free while salary sacrifices are made before tax. So you could keep your income the same but tip extra money into super at the same time.
Anyone over 60 can withdraw between 4% and 10% of their funds a year and creating this super ‘savings loop’ is a tremendous way to give your retirement a last-minute boost.
Find out more about TTR here.
But let’s get back to that mortgage as the clock ticks… and the possibility you won’t repay it by retirement.
3. Super versus mortgage
It is a perfectly valid strategy to use super money to pay off your mortgage when you retire… and there is an argument, as you get closer, to maximise your available money to do so by instead saving any excess into super.
Because of the tax treatment, by doing so you may correspondingly have more to shift across to discharge debt at the end.
Of course, you will want to be left with enough money to live on.
But don’t despair if it’s just not looking like stretching…
Countdown: 1 year to go…
1. Reverse the mortgage process
If you are likely to find yourself in a situation where you don’t have enough to repay the mortgage and to live, there is another option: move to mortgage payments in ‘reverse’.
A reverse mortgage is a potential top-up strategy, commonly used in both the United Kingdom and United States.
And providers report that the most common reason for taking out a reverse mortgage is to pay off your foundation mortgage.
A reverse mortgage operates exactly like a regular mortgage except that you make no periodical repayments. Instead, what you owe each month rolls up and is added to the loan.
As such, the loan grows each and every month. The interest rate is also expensive at maybe 200 basis points higher than a normal mortgage.
More on this: The pros and cons of a reverse mortgage
The idea is that the loan is ultimately repaid from the sale of your property, either when you decide to sell or when you die from your estate. So the longer the reverse mortgage is in place, the higher the debt grows.
But if property prices grow too, there may still be excess equity to leave to your heirs.
Which brings us to perhaps a newer consideration…
2. Position to help progeny
Many parents approaching retirement are watching their kids struggling financially. As in, really struggle.
It’s no wonder that the Bank of Mum and Dad is now said to be between our 5th and 9th largest lender in the country.
What might your kids need and when… and what might you be willing and able to give them? Think about and prepare for it if relevant.
This might help: Should you spend the kids’ inheritance?
Finally, what about putting in place an early retirement strategy…
3. Invest elsewhere too
Super is our most tax-effective investment vehicle.
But because of that, there are those stringent rules about access to it that I mentioned at the beginning of this retirement countdown – 60 if you’ve officially retired and 65 if you haven’t.
And there is always the possibility that successive governments will restrict and raid with more tax changes.
So it may be a sensible supplementary strategy to invest outside of super too.
Big dividend stocks – which you can reinvest if you don’t need the extra cashflow – also come with franking credits for tax the company has already paid, so carry their own systematic advantages.
And if you hold them for more than a year, you’ll get a 50% capital gains tax discount when you sell as well.
With all of this in place, might you even be able to start to wind down work a little earlier than you expected?
This article reflects the opinions and experiences of the author and does not necessarily reflect the views of Citro. It contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments or to provide any recommendations. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their personal financial circumstances, objectives and needs.
Feature image: iStock/insta_photos
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