Superannuation could make retiring at 60 easier. The catch? Affording it can be tricky. Fortunately, one strategy could help Australians ease into retirement while potentially trimming their tax bill.
It's called a Transition to Retirement (TTR) strategy. Once you reach 60, you may be able to access some of your superannuation as an income stream while continuing to work.
That creates an intriguing possibility: work fewer hours, replace some lost salary with super, and potentially keep building your retirement nest egg.
Image source: Getty Images
How this strategy works
A TTR strategy allows you to replace part of your employment income with payments from superannuation.
You could then salary sacrifice some of your remaining wages back into super. Concessional contributions are generally taxed at 15% within super, potentially lower than your marginal tax rate.
In theory, you could work less without taking quite as big a hit to your household income, while continuing to add money to your superannuation.
Here's what it could look like
Imagine you're 60 and earning $100,000 a year.
You decide to move to four days a week, reducing your salary to $80,000. You then withdraw $20,000 from a TTR pension to help replace the lost income.
-At the same time, you salary sacrifice $15,000 of your wages into superannuation.
The result could be a clever reshuffling of your cash flow: less employment income, some income from super and additional money continuing to build your retirement savings.
That could make easing into retirement considerably less painful.
But there's no free lunch
Before jumping into this superannuation strategy, investors need to understand the rules.
Employer Super Guarantee contributions and salary sacrifice generally count towards your annual concessional contributions cap. Exceeding the cap can result in additional tax.
TTR pensions also have minimum and maximum withdrawal limits, meaning you can't simply empty your superannuation account.
There's another catch: money withdrawn from super is money that's no longer compounding inside the fund. Taking too much too early could therefore undermine the very retirement savings you're trying to protect.
Foolish takeaway
A TTR strategy could offer an appealing middle ground between working full-time and calling it quits.
For eligible Australians, combining superannuation withdrawals with salary sacrifice may help reduce working hours, manage taxable income and continue building retirement savings.
But the optimal strategy depends heavily on your circumstances. Before making changes, consider speaking with a licensed financial adviser or tax professional to ensure the strategy fits your goals and the relevant contribution rules.
