Ever wondered what to expect from financial planning? Or do you have money or investment questions you’d love some guidance on from a financial advisor?
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Dear Aussie Advisor,
I have a question in regards to what I should be considering when it comes to investments and planning for retirement.
I’m 55 years of age and my wife is 51. I earn about $155,000 pa, and my wife $58,000 working part time.
I have $425,000 in a defined benefit fund which I could, hypothetically, access, should I leave my current employer. My wife has around $135,000 also in a defined benefit fund. We will be mortgage-free at the end of this year, but will keep the redraw amount of around $55,000 sitting there for some kitchen renovations. We have one other loan for a vehicle of around $55,000 at 2.75 per cent over 3 years. We have shares to the value of $18,000, and savings of around $95,000.
Should I resign and take a part-pension, part-lump-sum and seek a new role somewhere else? Or should I increase my super contributions? I currently contribute only $2,100 PA on top of compulsory contributions, and my wife contributes $5,100 PA on top of compulsory contributions both salary sacrifices. We have two older kids at home – one working full time and paying board, and the other working part-time and at uni. We have no other debts.
Interested to hear what you think I should be doing.
Thanks so much for writing in. It sounds like a really exciting time for you, and you’re entering what is, probably, one of the most interesting phases of your life in terms of personal finances. Turning 60 broadens these horizons, with alternative options becoming available to you to fund this period of your life.
There is a lot to break down here, your:
Let’s start by addressing your superannuation.
Your wife and yourself are very fortunate to be in a ‘defined benefit superannuation fund’. Today, these funds are as rare as hen’s teeth. As the name suggests, a defined benefit fund defines your future retirement benefit. This means that, at a defined age, you will receive a multiple of your salary for the remainder of your life, indexed normally to inflation.
Whilst these defined benefits come in many shapes and sizes, you are, typically, categorised in to an age range, such as age 60, 65 or 70, and then given the figure you will receive in your first year is dependent on your salary. They do vary between funds, so it would be beneficial to look into your current position.
You noted that both your wife and yourself are contributing extra to your superannuation through salary-sacrifice contributions (concessional contributions). For education’s-sake, I will note that your concessional contributions cap at $25,000 per person, each year. This annual amount is made up of both the super guarantee that your employer pays, and any salary-sacrifice portion that you make. Your non-concessional contributions are anything you contribute to super after tax has been paid on that money.
In defined benefit funds, the end balance of your defined benefit does not typically determine the pension you will receive at your retirement time. That is, regardless of whether you contribute extra or not, the outcome of the pension you will receive will be the same.
Some, but not all defined benefit funds, have an element that allows for you to contribute to an accumulation portion, as well as the defined benefit portion. Given your decision to contribute extra, I have assumed your elected fund does allow for this.
However, in the case it doesn’t, you may like to consider opening an additional superannuation fund, one which is low cost and provides a stable investment strategy, and send your salary sacrifice contributions to it, separately. Contributing more to superannuation now will reward you with more tax effective investment options in the future.
With five years until you are entitled to access your superannuation and sufficient cash flow, you could, now, focus on reducing any non-deductible debt to remain financially prudent.
Your car loan appears manageable; however, getting rid of any non-deductible debt is always going to be the financially prudent thing to do. You could consider paying the car off and using the excess cash to then build your personal investment portfolio.
Similarly, you noted you will be mortgage-free at the end of this year, meaning your mortgage contributions can go directly into savings as of 2021. Instead of using your $55,000 redraw to upgrade your kitchen, you might think about using your $95,000 in savings to do so, leaving you debt-free.
With regards to your current investment portfolio, it is modest, but a great additional investment opportunity. You should, first, questions how soon you foresee yourself needing your funds. If you choose not to use your savings towards your kitchen, you may like to combine the $95,000 with your non-concessional contributions, and put the money into your investment portfolio.
Alternatively, you could put the funds into your superannuation, too. This is, of course dependent on whether you think you will need any of this in the next five years but having that money in super means that it can grow and also provide a tax effective income in retirement, past age 60.
Whilst the question of, “am I better off sticking around for my defined benefit pension entitlements, or can I leave and take a different role?” is a common one amongst those involved in defined benefit funds, the outcome of my suggested strategy is very much tailored to the individual.
However, without knowing the intricate details in your particular case, often, I have found the client is better off sticking with their current employer and reaping the rewards of the full benefit distributed at the age of 60. I have, however, seen clients take this into consideration and still make the decision to leave and seek work elsewhere. This is because job satisfaction was more important to them.
It is also important to consider that your wife is younger than you, and, thus, has longer before she can access her retirement benefits, and, therefore, longer to contribute to your retirement funds.
Overall, it sounds as though you have both set yourselves up well and you’re in a great position.
As you enter this next phase, remember to keep your investment costs down, reduce that non-deductible debt as soon as you can and, in the long run, you will be rewarded for it.
Wishing you all the very best.
Brendan Gow, an authorised representative (no. 427470) of Shaw and Partners Limited AFSL236048 (the “Aussie Advisor”). This article has been prepared without taking into consideration any investor's financial situations, objectives or needs. Accordingly, before acting on the advice in this article, if any, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise. Shaw or its authorised representatives may also receive fees or brokerage from dealing in financial products, see Shaw’s Financial Services Guide for information about the services offered by Shaw available at http://www.shawandpartners.com.au/.
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