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So it’s finally time to retire … or is it?

To help you decide whether you’re ready to quit working and how much you will need, Bina Brown does the sums.

So you think you may be ready to retire. Before you swap your office garb for the gardening gear, you may need to think about the timing, among other things.

The big question for most people is: “Do I have enough money saved to live comfortably?”

But other considerations are your age and whether you are psychologically ready to give up what, for many people, has been the biggest slice of their life.

Retirement author Jill Weeks says people need to plan carefully what they are going to do and if they are going to move.

They should not underestimate what an important part work has played in their lives, she says. Apart from the money, work gives structure, meaning, activity and networks, among other things.

It is also important to think about what people are going to do. For example, will they retire completely, do some part-time or casual work, volunteer, try a new activity, learn a new skill, mentor?

Weeks says while for some people it is something they look forward to and a new beginning, others may have problems with the adjustment.

“Some people may have relevance deprivation … the ‘I used to be’ syndrome,” she says.

Your age

According to the transition to retirement rules, if you have reached your preservation age (currently 55), you might be able to reduce your working hours without reducing your income.

Until recently, you could only access your super once you turned 65 or retired. This meant it was difficult to reduce your work hours and still maintain your standard of living. With a transition to retirement pension you can withdraw some or all of your super over into a retirement income stream. Then you can top up your reduced income by drawing on your super.

Because of the caps placed on the amount of super that can be contributed at the concessional tax rate of 15 per cent, it is important to maximise those contributions before you retire completely.

“Once you start a retirement pension you can no longer add money to that account so it is important to make sure you get the maximum contributions allowed for one year into your account,” says a wealth management partner with HLB Mann Judd, Jonathan Philpot.

A person aged 50 or over can make concessional contributions up to $50,000 a year. Philpot says a person aged between 60 and 65 considering retiring may want to wait until the new financial year. This way you get to make an extra year’s worth of super contributions, he says.

A person over 65 must satisfy a work test (you must work at least 40 hours over a consecutive 30-day period) in order to make a contribution into super in that year. Delaying retirement into the new financial year will provide an additional year to make contributions.

The director of Strategy Steps, Louise Biti, says a couple of things to check include whether you will be paid out any unused leave. “Retiring may trigger a lump sum for unused annual or other leave, which can be taxable income,” she says.

“You may need to estimate what your taxable income for this year and for next year would be if you included the lump sum in either year and decide if it makes a difference to the amount of tax you could pay.”

Biti says retiring early in the next financial year may mean less tax if you fall into a lower marginal tax rate. However, remember the government is planning to add a 0.5 per cent-1 per cent flood levy to increase tax rates.

She says adding the amount in next year could also impact the age pension (if you’re likely to be paid it) or eligibility for a seniors health card.

If your employment is terminated due to redundancy, part of it may be tax-free. The thresholds increase on July 1 each year so receiving payments next year can reduce the tax payable.

Do you have enough?

The big question for many potential retirees is: “Do I have enough saved to live off for the rest of my days?”

There is no magic figure retirees need to have saved for their retirement, as it depends on individual circumstances.

Biti says, as a general rule of thumb, that a lump sum of $500,000, excluding the home, can be expected to provide a person retiring at age 65 with an income of $35,000 until age 85, assuming average earnings of 8.5 per cent a year and no government assistance.

“Add in eligibility for the age pension [as a single person] and this will extend income out to age 99, which should help to deal with longevity risks or the need to perhaps draw on some extra capital from time to time,” she says.

Philpot says a “safe” level to work on when commencing retirement is to assume you will draw down 5 per cent of your pension balance amount each year.

Road to success is paved in goals

After 45 years in the workforce, retirement is not something Alek Jankowski, 64, is taking lightly.

The general manager of a large multinational company, he has considered everything from affordability to what he is going to do and where he will live with his wife, Liz.

“I’ve always thought that you need to plan retirement like you do your career,” he says.

“You have to make sure there are things in front of you that you are going to do.”

In addition to devoting more time to things Liz likes doing, such as travel, Alek has interests and hobbies he hopes to pursue.

The actual retirement date is yet to be set and depends on a number of factors including the sale of assets and Alek’s age.

The principal of Woodbury Financial Services, Errol Woodbury, says care needs to be taken in the timing to balance a low-tax year with age.

If Alek retires this year, his assessable income will be lower, so if the couple need to sell down assets, the triggering of capital gains in a lower tax year will mean they will pay less CGT. “Because Alek is under 65 he can also take advantage of the $450,000 contribution rule into super so that these assets that have been sold can now reside in a tax-free structure for retirement,” Woodbury says.

A likely option if property is not sold before turning 65 is to retire in July 2012.

Because Alek will be 65 he can continue to contribute to superannuation if he meets the work test.

“It is important that people start the process well before the actual date,” Woodbury says.

“A plan needs to be drawn up with a timeline outlining specific action items to be achieved by certain dates.

“In Alek and Liz’s case, the plan also highlighted issues to be thought through and some possible solutions to help them make an informed decision to be comfortable with their final date.

“We also helped to get their financial house in order by consolidating numerous super funds and commencing a transition to retirement pension now,” he says.

Source: Business Day

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