For many Australians, retiring at 60 feels more like a dream than a realistic goal. But there's one superannuation strategy that could make the transition easier while potentially reducing your tax bill at the same time.
It's called a Transition to Retirement (TTR) strategy. Once you turn 60, you can start drawing an income from your super while continuing to work.
That means you might reduce your hours, ease into retirement, and supplement your income with tax-effective payments from your superannuation rather than relying solely on your salary.
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Cut your hours, not your financial future
A TTR strategy allows you to replace part of your employment income with payments from your superannuation.
For many people, the next step is salary sacrificing some of their remaining wages back into super. Those concessional contributions are generally taxed at 15% inside superannuation instead of your marginal tax rate, potentially boosting your retirement savings while lowering your tax bill.
The result? You may be able to work less, maintain a similar lifestyle, and continue building your nest egg.
How it works in practice
Imagine you've just turned 60 and earn $100,000 a year. You decide to cut back to four days a week, reducing your salary to $80,000.
To help make up the difference, you start a TTR pension and withdraw $20,000 from your super over the year. At the same time, you salary sacrifice $15,000 of your wages back into your super.
The outcome could look like this: you work fewer hours while maintaining a similar level of income, with part of your cash flow now coming from your superannuation instead of your employer.
Your salary sacrifice reduces your taxable income while boosting your retirement savings, and the money remaining inside super continues to benefit from its concessional tax treatment.
For Australians who aren't quite ready to stop working completely, it can be an effective way to ease into retirement.
Watch the fine print
Like any tax strategy, a TTR isn't a free lunch.
Employer Super Guarantee payments and salary sacrifice contributions count towards your annual concessional contributions cap. Exceeding that cap could trigger additional tax.
TTR pensions also have minimum and maximum annual withdrawal limits, so you can't access your entire super balance.
Finally, remember that every dollar you withdraw is a dollar that's no longer compounding inside your super. Taking out too much, too soon could reduce your retirement savings over the long term.
Foolish takeaway
A Transition to Retirement strategy can be a smart way to cut back your working hours without dramatically cutting your income. Combined with salary sacrifice, it may also improve your tax position while helping you prepare for full retirement.
Like most super strategies, however, the biggest benefits usually come from tailoring it to your own circumstances. Before making changes, it's worth speaking with a licensed financial adviser or tax professional to ensure the strategy suits your goals and stays within the contribution rules.
