Many of us grew up believing retirement was something that would happen overnight: working one day, free the next.
But to truly make the most of retirement financially, you may need to approach it as a more gradual process.
In fact, by drawing on your super before you finish work, you may find yourself entering retirement either a more comfortable lifestyle, or more set aside for the years ahead.
The key is making smart use of an income stream.
What is an Income Stream?
A retirement income stream (also known as a superannuation pension) is simply a way that you receive a regular income in retirement – and, if you choose, in the years leading up to it.
Your income stream is paid in regular scheduled increments, with an amount you can choose yourself and change any time if needed.
You can begin drawing down on your super this way once you reach preservation age, which for many is 55 years old. Use the calculator to check for yourself.
Starting an income stream while you’re still working is known as a Transition to Retirement strategy (TTR) – and it can see your super balance increase, even as you begin to draw down.
The most important thing to know is that income streams are very flexible, and will need you to set a clear strategy with your financial plan in mind.
How a transition to retirement can add more to your super fund
With some smart changes to the way you disperse your super and your income, you could:
- Get more money into your super fund by salary sacrificing your earnings directly into your super fund (potentially saving on income tax), then receiving it as a regular tax-free income from an income stream.
- Work fewer hours and use your income stream to make up the difference.
How to reduce your working hours without changing your income.
If you are planning to scale back your work hours under 65, this income stream can effectively serve as a tax free top-up, making up the difference from your old income. In other words, you can maintain the same standard of living as before, but with more time and freedom to enjoy it.
Meanwhile, the bulk of your hard-earned super remains invested.
How to reduce your income tax
Drawing on your super this way could also have significant tax benefits – particularly if you choose to continue full-time work.
This strategy involves two simple steps:
- Salary sacrificing your income directly into your super fund. (This contribution will be taxed at 15%.)
- Drawing income straight from your super as an income stream. (This is tax-free if you’re over 60)
If your regular income tax is higher than 15%, the savings accrued over time could make this a very worthwhile strategy.
However, this approach is not for everyone. If you choose to drawdown under 65 years of age, a minimum drawn down rate will apply of 4% and a maximum of 10%. It is compulsory to drawdown 5% after 65 years of age if you are not working.
The short-term benefits will also need to be weighed against potential long-term needs. Drawing down on your super earlier can, of course, leave you with less in later years. Your super fund will be able to offer a financial planner to advise you on whether or not this strategy is right for your situation.
Continuing an income stream after retirement
When you hit official retirement, there is a temptation to draw down your superfund in full and pay off debt. This needs to be carefully thought out, ideally with an adviser that understands your situation.
“Once you’ve successfully transitioned into retirement, continuing with an income stream can be an ideal option for many retirees,” said Zak May, Director of Policy at Industry SuperFunds.
“An income stream from your super fund at this point can serve as a reliable supplement to the Government Age Pension, making life more comfortable for many years into the future.”
Most importantly, by receiving your super in increments, your fund’s investments to continue working for you, potentially leaving you with more in the long run.
Click here to learn more about the income streams available to you.