Friday 8 September 2023

Transition to retirement plans

I currently plan on sticking with my current full-time employment (barring any serious health issues or being made redundant) for another 8 years or so -- which would bring me to age 70. When I turn 65 I will be able to transfer my SMSF accumulation account balance into 'pension phase', which will mean (under current tax law) that the earnings and capital gains be taxed within the SMSF at 0% rather than the normal 15% tax rate on earnings (and 10% on capital gains). Based on my current SMSF balance, 10% SGL contributions and roughly 6% real rate of return, I should be close to the TBC (transfer balance cap) of $1.9MM at age 65. I might use $100,000 or so of the TBC at age 65 to purchase a deferred lifetime annuity to commence payments from age 85 -- which should provide an annual inflation-adjusted income of about $21,500 pa from age 85 onwards (which would cover around half of my budgeted living expenses). This should be sufficient to ensure I have sufficient retirement income even if sequencing risks adversely affects my SMSF balance (e.g. if there is a major market crash just after I retire and switch from making contributions to making withdrawals).

The mandatory minimum drawdown rate from an SABP (Simple Account Based Pension) for someone aged 65-74 is 5% pa, so a $1.9MM account balance in pension phase would require $95,000 tax exempt pension payment to initially be made each year. As I plan to be still working FT to age 70, the entire pension income can be used to quickly pay down the balance on my investment apartment loan while I am still working (and working on my PhD).

The investment apartment should become cash flow positive after a few years of paying off the mortgage principle using my SMSF pension income.

Once I retire from FT employment I plan to continue working PT as a financial advisor for up to decade (depending on how I feel at the time). The SMSF pension should be sufficient to cover living expenses and pay off the remaining investment property loan fairly rapidly, so any additional income earned as a financial adviser when 'semi-retired' will be available for investment (probably into my investment bond).

Then when I eventually fully retire, my financial planning business *might* be able to be sold for around 3.5x annual revenue, but I can't really estimate what that might be, Once I completely stop work the SMSF pension should be considerably more than I require, so I will probably invest any surplus income. As the SMSF pension is tax exempt, I will be able to earn up to $45,000 pa from personal investments, rental income etc. and stay within the 19% tax bracket. The net rental income from the investment apartment probably won't be quite this much, so I can probably invest some amount in my own name, then, once the taxable income gets over $45,000, I will direct any surplus income into my Investment Bond account, where it is internally taxed at up to 30% (probably around 20% due to being invested in the tax optimised funds).

The SMSF balance should continue to grow as long as the minimum drawdown rate remains below 8% (the 9% withdrawal rate kicks in at age 85), after which the pension payments will have increased to an extent that it starts to erode my SMSF account balance. The increasing surplus of pension payment compared to my budgeted living expenses (around $40,,000 pa) will be invested in the Investment Bond (and can be withdrawn tax free at any time if I require some additional income during retirement).

I doubt that my SMSF balance will be depleted during my lifetime (longevity risk), but in any case my existing deferred lifetime annuity will commence making pension payments of about $40,000pa (indexed to inflation) from age 99 onwards, so I won't have any financial concerns if I happen to live as long as my great Aunt (who made it to 104).

I did a rough calculation of how my NW has tracked over the past 20 years or so, adjusting the monthly figures to constant 2022 $ terms using the RBAs annual cpi index data, and also adding in the 'deflated' value of the lake house property I was given in 2014 for the prior year figures. I have been savings/investing around $25K pa over this period, and using an average rate of return (after tax) of 6% produces a 'projection' curve that tracks pretty closely to my actual NW. Based on this I should have around $10MM NW by the time I fully retire, and as the required retirement income will be negligible ($40K pa is only 0.4% of $10MM) my NW should continue to grow somewhat in line with this 'projection' even during my retirement. Of course any prediction extrapolating several decades into the future is likely to be nowhere close to reality.

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mOOm said...

Currently I'm thinking that when someone hits 65 I should start an account based pension whether working or not as you can recontribute the payouts and in the meantime pay zero tax on earnings. Problem is if you already hit the $1.9 million balance cap transfer then you can't. If things go well then that seems likely for me as I am already at $1.5 million... But I guess I could contribute to my wife's super instead until hitting her balance cap transfer. I'm not clear whether if you already are at the balance cap transfer limits it could make sense to keep super in the accumulation phase and spend down higher taxed assets outside super first instead of paying out super to just be reinvested at higher tax rates though paying zero on what remains in the fund? I probably need to do some simulations of these things...

Bigger picture, seems to me that you will have a lot of money on these projections. Does it make sense to work as long as you plan in your current job? said...

If the fund earns about 10%pa, then reducing the tax rate from 15% to 0% will effectively reimburse about 30% of the 5% min drawdown pension. The pension payments could then be invested in spouse super, or children's super to put it back into the 15% tax environment, or could be invested in an investment bond (where some of the 'tax aware' investment funds apparently average around 20% tax rate, rather than 30%), or could be invested in a growth oriented index funds where most of the overall return was long term unrealised capital gains rather than taxable income, or could be invested in non-income-producing assets (art, bullion, etc), or used to service the cashflow requirements of a negatively geared investment property (like I will be doing).

Big picture, I don't have anything in particular I need to be retired to do, so I'm happy enough to keep working while doing my PT PhD, getting some clients for my PT financial planning business, and indulging in my hobby of accumulating NW. Unfortunately retiring is often a non-reversible process -- so unless I get retrenched or have health issues I'll just keep working until I don't feel like doing it anymore.