Transcript
Today, we’ll check out the retirement planning journey of Tony and Anna. They’re a typical Australian couple with a mortgage, and that’s costing them $3,500 per month. They’ve got 15 years remaining on that loan, so they expect to have it repaid by the time they retire. They haven’t focused on their superannuation in the past, and together they have a combined balance of $295,000, which is roughly average for a couple of their age. Tony is 50 and he’s earning $80,000 a year, while Anna is a little younger at 48 and she earns $65,000 a year. They don’t expect that their incomes will change significantly between now and retirement, apart from just going up with inflation. So they’re starting to wonder if they’re going to be able to reach their retirement goals. Next, we’ll take a look at what those goals are.
Tony’s always planned to retire at 65, and Anna doesn’t want to work while he stays at home, so she’s planning to stop work at the same time when she’s 63. They’d really like income of $75,000 per year, which is actually more than they’re living on right now after they pay their mortgage repayment.
But they’ve always had a dream to travel both in Australia and around the world, and they’d like to use their retirement years to do that. They even have a stretch goal of having $85,000 per year until they turn 80, when they’ll be more prepared to wind down their lifestyle and start to stay at home. Lastly, they’re really concerned that their income should last for life because the last thing they want is to end up living on the age pension alone, with no savings and no other safety net. The first thing for our couple to look at is what we call the do nothing scenario. What if they just keep paying their mortgage, living their life and don’t make any extra contributions to super?
The projection shows that their retirement income of $75,000 a year would be achievable, but it would only last them until age 88, and they’re really concerned that they will live a lot longer than that, being fit and healthy people. So being quite disappointed with this outcome, they take a look at their expenses and what they have coming in and decide together that they can afford to contribute an extra $650 a month into their savings through super.
Now they’ve worked out what they can afford. The next step for Tony and Anna is to figure out the optimal way to make those contributions. They’ve never put money into their super before, and they’re not sure where to start, but they find a tool on ASIC’s Moneysmart website called the Super Contributions Optimiser, which is just what they need in this tool. They can put in their incomes and what they can afford to put into super, and the tool will tell them the most optimal way to do that. It takes into account the tax position of the couple as a whole and each individual, and also considers whether either of them would be eligible to receive a co-contribution from the government if they made after tax contributions to super.
Once they put in all their details, the tool recommends that Anna be the one to make super contributions, and you can see here that it’s suggesting she put in $977 per month as a before tax or salary sacrifice contribution. Now, at first, Anna gets a shock because she knows she can only afford $650.
But when they look further into the details of the tool, Tony and Anna can see that this contribution is only going to cost Anna $650 a month out of her take home pay, because it’s a before tax contribution or salary sacrifice, it’s being deducted from her salary as a whole before her income tax is calculated so she can have faith she’ll still have enough money to buy what she needs. The reason that the tool is recommending only Anna make contributions is that as a lower income earner, she is eligible for the low income tax offset, and the more she chooses to salary sacrifice, the higher her low income tax offset is. So you can see how sophisticated this little calculator can actually be.
When we insert Anna’s salary sacrifice into a projection, we can see that the super is estimated to last another seven years. And while a couple are pretty happy with this result, it makes them start to wonder if they could even aim a little higher and go for that stretch goal of a higher income in their early retirement to fund their travels.
In the spirit of aiming high, Tony and Anna have discussed that if they can make their stretch goal happen, they’d be prepared to live on a lower income in their later retirement. After having a chat, they work out that they think $70,000 a year after the age of 80 would be enough for them to have a comfortable retirement at home once their travelling days are over. When they put those figures into a projection tool, they’re really happy to see that it looks like their retirement goal could be possible, but they’re still concerned that their balance might run out before they do. So they’re starting to wonder if working a little longer might make a difference.
Looking at their revised projection, Anna and Tony are blown away by the difference that working just two more years could make to their retirement outcome.
Their super is now predicted to last until at least age 100, so they can spend in their early retirement with the confidence that they’re not risking living in poverty in their later years.
Retirement planning is never set and forget, so Tony and Anna will review their plan as the years go by to see what else they can do. Perhaps they’ll even get a significant pay rise, or receive an inheritance that could allow them to retire earlier.
