Aim for $2m to maintain lifestyle
Michael is a wealth management partner at HLB Mann Judd Sydney. hlb.com.au
If Kathleen and Tim require an annual after-tax income of, say, $100,000 to maintain their lifestyle in retirement, they’d need about $2 million in investment wealth on retirement to preserve their capital base and live off the investment earnings. This is assuming they can draw at 5%pa and not eat into capital over the longer term. Strategies they could consider include:
• Continue making the maximum concessional contributions to Tim’s superannuation account. Although this will be limited to $25,000 from July 1, it is a good way to boost super over the next 10 years. This is likely to get them halfway to what they’d need in retirement by age 62, being about $1 million (in today’s dollars).
• To boost Kathleen’s super balance Tim could make nonconcessional (after-tax) contributions of up to $3000 on her behalf and claim a tax offset of up to $540 in his personal tax return. To be eligible for the full rebate, Kathleen’s taxable income would have to be below $10,800 for the 2016-17 financial year. From July 1 the income threshold will increase to $37,000.
• Review the investment strategy of your super to ensure an appropriate level of risk is being taken. Longer-term investments of five years or more should have a substantial allocation to risky assets such as shares. An investment time frame of five years or more allows enough time to ride out the short-term volatility of shares.
• Where one partner has no taxable income, it can be more tax effective to invest in their name rather than in super. Individuals can earn up to $18,200 before paying tax while income earned on money invested in super is taxed at 15%. Consider investing any surplus rental income in Kathleen’s name rather than making non-concessional contributions to super now.
• Kathleen could set up a family trust which, together with the rental properties, will be able to provide the other half of income required in retirement. Family trusts provide flexibility in distributing income to lower-income earners. They also provide asset protection and are fully accessible to the family as and when funds are needed, whereas access to super is most often restricted until retirement.
• Consider estate planning to make provisions for kids to be looked after financially over the long term should something happen to Kathleen and Tim.
• Have appropriate life insurance to provide for the family if something were to happen to Kathleen or Tim. Income protection can be crucial to protecting the financial position of a family where they depend on the income-earning capacity of one spouse.