To grasp your tipping point,you need to understand your cost of living and lifestyle and costs of the one-off expenses and experiences you want to build into your life,ideally annualised for the “good years”. Then you need to work through the income sources and become more literate about how they work in the second half of life. Here’s how I think about them:
Consider your income streams in phases.Take time to explore how much income you will be able to generate from passive and non-passive sources and contemplate how these change over the years ahead.
A good way to do this is to map your years ahead into phases and list the income available in each. Consider how much work income you want to generate per annum in each phase.
Then contemplate the other layers of income that will be available to support you,based on your access to superannuation,the age pension and income from investments outside super. It helps you see what’s possible.
Really understand how superannuation works.After you’ve built your budget and assessed your income needs,you should run the projections to work out how your phases time into your access to superannuation.
It helps to become more familiar with the superannuation system,as it is much more flexible than people give it credit for. Consider that you can retire from full-time employment at any time after the age of 60,or what is known as preservation age,move up to $1.9 million of your superannuation into retirement phase and commence an account-based pension that is entirely tax-free.
Loading
Then you can return to working full-time,part-time or casual without penalty,leveraging your ability to make compulsory employer contributions to super all your life and concessional contributions up to the age of 75. Or you can keep working and access your super unconditionally from 65 too.
Know how the pension plays into your picture.The Australian age pension system is a great safety net,and if understood well can become a layer of your retirement income that kicks in typically at the age of 67,when you may want to take a step back from the workplace.
It’s important to really understand how the pension fits into your wider financial picture,and how it layers with your superannuation and work income at different ages and stages of life.
Decide whether to spend or save into full retirement.People are often surprised when I point out that in preparing for their pre-retirement years and,later,their retirement,those with healthy but not enormous superannuation balances might want to consider two completely opposing strategies and weigh up their standard of living in each. A financial adviser can help you with this.
One approach is to spend harder on lifestyle earlier in your life,using a portion of your hard-earned savings and relying on more of the age pension once eligible. The other is to carefully preserve your capital with the goal of having a completely self-funded income stream,or at the very least,looking only to access the age pension very late in life.
Not everyone will be able to chase their tipping point before retirement,but as life expectancies expand and superannuation grows,it’s worth understanding your choices.
Bec Wilson is the author of bestseller,How to Have an Epic Retirement. She writes a weekly newsletter atwww.epicretirement.net and is the host of thePrime Time podcast.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.