For some parents, the years between their youngest child finishing high school, or university, and retirement, provide a great opportunity to increase superannuation contributions and better organise themselves, financially, for their post-work life.
It isn’t just about school fees, or paying lower food bills. Often people climb the corporate ladder in their 40s and 50s, earning more money. Or they come into a windfall through inheritance. Maybe there’s an opportunity to downsize the house and put more cash away for retirement. People can have more disposable income, just as they think more about retirement.
The ‘post-school years’ are an opportunity for people to get on the front foot ahead of retirement. They can make a considerable difference to the amount a person has when they eventually finish work.
Here we provide a tipsheet on what to think about in this period of your life, in an effort to save more for retirement.
Creating a retirement savings plan helps you understand what your desired retirement income might look like. Normally that starts with creating a budget, and working out how much money is coming in, and how much you are spending. For example, you might find you have more money to save than when you had dependants.
The plan should help show how much you’ll need to save for retirement and help you understand costs you may need to scale back to achieve your goals. A financial adviser is a great starting point to create a retirement savings plan.
When feeding and housing dependants, there’s normally not much spare cash. But when the kids leave home, or start to pay board, that can change very quickly. Maybe the extra cash from a promotion at work is best spent preparing for retirement.
You may be able to increase your before-tax super (concessional) contributions. You could talk to your employer about making contributions via salary sacrifice, which is where part of your before-tax wage or salary is directed to super instead of being paid directly to you.
You may also be able to make a contribution out of your own pocket; earnings on your super savings are only taxed at 15% but be aware of the contribution caps.
The extra cash might allow you to contribute more to super. If you have a spouse or partner, it may be worth making a contribution to their fund. Once again, be aware as annual limits on super contributions do apply. A financial adviser can help explain these limits.
Now may also be the time to review your super fund and to check that your nominated investment strategy is in line with your tolerance for risk. Pre-retirees may be tempted to shift their super into lower risk, conservative options. But it could pay to have part of your retirement savings, including super, invested in growth assets to generate long-term capital growth.
Given you have fewer child-related expenses, and possibly more income to invest, it is the perfect time to explore these options with a financial adviser.
If you have insurance inside or outside your super, you may want to check if your cover still suits you, and your family’s needs. Having fewer, or no, dependants might mean a different insurance coverage is more suitable.
No matter what your financial position is today, an unexpected event can see it all unravel very quickly. Insurance cover can help so that if there is an unforeseen event, you and your family can hopefully continue to move forward – and it can lessen the impact to your retirement savings.
Another option to consider is using part of your super balance to purchase a transition to retirement pension. When combined with salary sacrifice super contributions, these pensions may help you put more money into your super without reducing your take-home pay.
If you still have money owing on your home loan, you may be wondering whether it is better to use spare cash to pay down this debt or add the money to your super. It is a good idea to speak with a financial adviser, who would be able to advise the best option for your circumstances and the economic climate.
Repaying as much of your debts as possible before you retire, can make a big difference to your lifestyle and the funds you’ll have available in retirement. While building your retirement savings, also consider a plan to proactively clear your debt by using any free cash flow to reduce the amount you owe to strengthen your financial position.
You may also want to consider any benefits gained from rolling your debts into one or using another provider that offers lower rates and fees.
A self-managed super fund (SMSF) can have benefits, allowing you to have more control over how your super is invested, within superannuation and taxation laws.
In addition to determining if you have sufficient capital for an SMSF to be worthwhile, consider whether you want the added responsibility, as managing your own retirement savings comes with costs of its own. One of those costs is time. Without the kids in the home, perhaps you have more time. Or if you have just taken a bigger job, maybe you have less time. A great starting point is to check in with a financial planner.
Along with your superannuation, it may be a good idea to grow some of your investments outside of super. This may give you a diversified pool of funds to draw on, as well as providing some protection against any unexpected legislative changes to super. If you have freed up cash, now may be a great time to think outside super.
If the kids have left home, downsizing to a smaller property could offer the benefit of a lower maintenance home and a way to access any potential home equity. It is worth crunching the numbers to be sure downsizing puts you in front financially.
The upfront purchase costs and stamp duty, in addition to ongoing costs, on your new home can take a bite out of your available cash.
There may be other options worth looking at, such as a reverse mortgages, which allow you to harness any home equity you may have without the need to sell a much-loved family home. But be aware of the rules around using reverse mortgages and other options.
If you’re 55 or older, you may wish to consider whether a downsizer contribution is appropriate for you. Under these rules, you may be able to make an after-tax (non-concessional) contribution into superannuation of up to $300,000 for an individual or up to $600,000 for a couple from the proceeds of selling your principal residence.
The usual contribution caps of $110,000 per year will not apply in this situation and it doesn’t matter what your super account balance is (you would usually only be able to make after-tax contributions if your total super balance is less than $1.9 million).
To be eligible for this measure, you must have owned the principal residence for at least 10 years prior to selling it. This may allow you to unlock the value of your home to help boost your retirement income. You should be aware that unlocking these savings may impact your entitlement to social security benefits, such as the age pension.
A roadmap for those navigating the path to buying a home. Read the home ownership article.
An easy-to-understand guide to payouts, what they are and how investors can use them. Read the dividends article.
Providing information on what estate planning is, what it involves and why people should not wait to act. Read the estate planning article.