Retirement doesn't have to mean stopping work overnight.
For Australians aged 60 and over, a Transition to Retirement (TTR) strategy could provide a way to cut back hours while using superannuation to help bridge the income gap.
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How does a TTR strategy work?
The basic idea is to replace some employment income with payments from your superannuation.
You could reduce your working hours and salary, then draw an income from a TTR pension to make up some of the difference. At the same time, you may be able to salary sacrifice part of your remaining salary into super.
Concessional contributions, including salary-sacrifice contributions, are generally taxed at 15% within super, which can be below your marginal tax rate.
Done carefully, this can create a useful reshuffle of your cash flow: less work, some income from super and continued contributions to your retirement savings.
Here's what it could look like
Imagine you're 60 and earn $100,000 a year. You decide to move to a four-day working week, cutting your salary to $80,000. You then draw $20,000 from a TTR pension to help replace the income you've given up.
At the same time, you salary sacrifice $15,000 of your wages into superannuation.
The result is a potentially more flexible path towards retirement. You're working less, drawing some income from super and continuing to put money into your retirement account.
For someone keen to ease into retirement rather than make an abrupt switch, that could be appealing.
But there are catches
TTR isn't a magic solution, and the rules matter.
Employer Super Guarantee contributions and salary-sacrifice contributions generally count towards your annual concessional contributions cap. Exceeding the cap can result in additional tax.
TTR pensions also have minimum and maximum withdrawal rules, so you can't simply withdraw whatever amount you want.
Perhaps most importantly, every dollar withdrawn from superannuation is a dollar that is no longer invested in the fund. Drawing too much too early could reduce the amount available to compound for your later retirement years.
Foolish takeaway
A TTR strategy can offer an appealing middle ground between full-time employment and full retirement.
For eligible Australians, combining superannuation withdrawals with salary sacrifice may help reduce working hours, manage taxable income and continue building retirement savings.
However, the most suitable approach depends on your income, super balance, age, contributions and retirement goals. The relevant rules can also be complex, so speaking with a licensed financial adviser or tax professional before making changes may be worthwhile.
For some Australians, though, the concept is compelling: work less, replace some lost income with super and keep building your retirement nest egg.
