REVISE RETIREMENT PLANS
I'm 53, working part-time and earning $33,000 while my partner (49) is earning $90,000. I want to retire in about four to five years, my partner maybe a year or so later. We own our home and two investment properties: one apartment in the inner city worth $430,000, and one house in the suburbs worth $450,000. We owe $270,000, paying interest only, and they just cover themselves with rent. We have an offset account and put any extra money into the loan. I have $180,000 in super that I can access in two years for a "transition to retirement" if it's worthwhile to do so, and my partner has $42,000. I guess we'd be considered moderate risk takers. I'd appreciate your opinion on where we should focus next. E.A.
I wouldn't be in any hurry to retire. A big problem today is that people don't realise how long they are likely to live and how much they will need to live a comfortable retirement. Don't forget that the "preservation age" is being phased up for people born after 1960, so your partner will be unable to access super benefits until age 58 if born in the 12 months to June 30, 1963, or 59 if born in the subsequent 12 months.
An Association of Super Funds study estimates that a retired couple can have a "modest" lifestyle on $31,760 a year and a "comfortable" one on $55,213.
Let's say you hope to retire at 55, with your partner at 51, and adopt a "comfortable" lifestyle, spending $55,213 in 2012 dollars. You can expect to go through about $1.55 million during your partner's 35-year average life expectancy, assuming she is a she, less if he is a he, since men have lower life expectancies. If she falls within the 50 per cent of people who live longer than the average, you will need more.
Your rents are probably covering both interest and capital, so you should be able to save a fair bit. Plan to retire with no debt and preferably $1.5 million in total assets, super and non-super, excluding your home.
DECLARE AN INTEREST
My mother died and left about $200,000 in an investment to me and my two brothers. We haven't been able to access this money fully because it was frozen during the global financial crisis. We have been able to withdraw some every few months, however. It has now been released to a bank account and has been earning interest. Who, if anyone, pays tax on this interest? Do we have to declare this income and is it divided by three? Also, we have $120,000 to invest. We own our home (worth $730,000), an investment unit (worth $320,000-$350,000) and are one-third owners in land that cost about $420,000 and is now worth less than $300,000. We have no debts, two young children, and earn about $160,000 between us, plus $18,000 in rent. What would be a good strategy? A.G.
Your mother appears to have invested in a mortgage fund that was frozen in 2008. If it remained in her name to 2012, then it would be regarded as part of her estate. A deceased estate is taxed at personal rates for three sets of June 30 deadlines, after which it is taxed at the top tax rate of 45 per cent.
It is more likely the account was transferred into the joint names of the three brothers, in which case you are each responsible for declaring one-third of the income.
You don't mention any super benefits, and if you don't have any, put your $120,000 into a super account.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
How much retirement savings should everyday investors aim for to retire comfortably?
According to the article, a reasonable goal is to retire debt-free with about $1.5 million in total assets (super and non-super) excluding your home. The Association of Superannuation Funds of Australia (ASFA) figures cited put a 'comfortable' couple’s annual spending at $55,213 (in 2012 dollars), and an example in the article shows that level of spending could consume roughly $1.55 million over a 35‑year retirement.
What is the preservation age and how can it affect when I can access my superannuation?
The article explains that the preservation age is being phased up for people born after 1960. For example, someone born in the 12 months to 30 June 1963 may not be able to access super until age 58, and someone born in the subsequent 12 months may have a preservation age of 59. That timing will affect when you or your partner can withdraw super or use transition-to-retirement strategies.
Should I use a transition-to-retirement (TTR) strategy if I can access super in a couple of years?
The piece suggests caution: don’t rush into retirement or TTR. You should consider your likely longevity and how much income you’ll need in retirement before using a transition-to-retirement arrangement. If you can access super in two years, investigate TTR as an option, but weigh it against the goal of retiring with no debt and sufficient total assets.
What role do my investment properties and offset account play in retirement planning?
In the article’s example the investor has investment properties and an offset account and puts extra money into the loan. The advice is to use rental income and offset savings to reduce debt and aim to retire debt-free. The writer recommends planning to build total assets (super plus non-super) toward about $1.5 million, while using the offset account and extra loan payments to lower mortgage balances before retirement.
Is interest earned on an inherited investment taxable, and who must declare it?
The article notes that if the investment remained in the deceased’s name until it became part of the estate, the amount is treated as part of the estate and taxed accordingly. If the account was transferred into the joint names of beneficiaries, each beneficiary would generally be responsible for declaring their share of the income (for example, one‑third each if three siblings). Deceased estates are taxed at personal rates for three June 30 deadlines, after which they are taxed at the top personal tax rate (45% as stated in the article).
If an inherited account was split between siblings, do I have to declare my share of the interest income?
Yes. The article says that if the inherited account was transferred into the joint names of the three brothers, each person should declare one‑third of the income on their tax return and pay tax on that share.
What investment strategy does the article recommend for someone with $120,000 to invest and no debts?
The adviser in the article recommends that if you don’t have any super benefits, a sensible move is to put the $120,000 into a superannuation account. This aligns with the broader retirement focus stressed in the piece—building super and other assets to support retirement.
How do ASFA ‘modest’ and ‘comfortable’ retirement budgets translate into planning for everyday investors?
The article cites ASFA estimates that a retired couple can live a 'modest' lifestyle on $31,760 a year and a 'comfortable' lifestyle on $55,213 a year (2012 dollars). Using the comfortable figure as an example, the writer calculates that retiring at 55 could require about $1.55 million to cover a 35‑year retirement for one partner—illustrating why many advisers recommend aiming for substantial retirement savings and to factor longevity into plans.
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