Planning early-age retirement, funding?
Early-age ‘retirement’ funding will be on the mind of some readers, including those with health issues, family/ dependant-support responsibilities, or the ‘financially-able’ all come to mind.
Retirement at an early age (and not already independently wealthy), may necessitate establishing an income source that is an alternative to your superannuation (until it is accessible). This may be supplemented in appropriate circumstances, by Centrelink benefits – but if the circumstances preclude that support, self-funding is necessary.
Early-age retirement funding can be ‘tricky’ before you reach your superannuation preservation age (the age when you can access your superannuation benefits – see further mention of ‘preservation age’ below): alternative investments need to be considered to provide for your financial needs in the interim.
Subject to the superannuation ‘rules’(1), to the extent they were taxed when contributions went into the fund, superannuation benefits are tax-free for those who have attained their preservation age. Note: you may be taxed on some superannuation benefits that you receive between age 55 and 60 but there likely to be a component that you will still be able to withdraw tax free.
These superannuation rules pose the question: When can you access your super?
Superannuation preservation age:
Your preservation age generally determines when you can withdraw your super (i.e., it establishes one of the ‘conditions of release’ of superannuation monies. Your preservation age depends on your date of birth – age 55 if you were born before 1 July 1960; and phased up to age 60 if you were born after 30 June 1964. A table showing the phased ages based on birth years is published on the ATO website: it is linked here.
In the context of this article, if you want to retire before 55 you need a pool of non-superannuation funds to fall back on because you will not be able to access your super on your (early) retirement. As noted above, if you were born before 1 July 1960 the earliest you can plan to retire, relying on your superannuation benefits, is age 55. If you were born after 1 July 1960 the earliest you can plan to rely on your super savings is phased in over 5 years and could be up to age 60.
So what are some tax effective investment options available to you now?
If you are saving for an early retirement, consider making investments for as long a term as possible. Even plain vanilla investments such as shares or equity-based managed funds that pay/ distribute franked dividends/ distributions are tax effective under legislation current at the time of publishing, for higher income earners, since you will only be paying the ‘top-up’ tax – up to your marginal tax rate.
In some circumstances you may be able to make your investment through a structured entity that allows you to minimise the tax paid on income generated by the investment (including any Capital Gains generated during the term of ownership of invested assets). These can include self-managed entities such as discretionary trusts but can also include the use of Bonds where the investment term is sufficient to optimise the tax benefits. (Early-retirees forced into their situation through an incident that has resulted in an insurance payout might have a particular interest in this strategy.)
Other investments options include, for example:
Tax effective investment products (that have an ATO Product Ruling).
Readers may be aware of a range of purported “tax effective investment schemes” in the marketplace. Be careful when deciding to invest in such a scheme and carefully assess the product disclosure information – and the risks. It is very risky to invest in one of these schemes unless they have an ATO Product Ruling (PR).
The PR sets out the ATO’s view on the tax benefits that are available for investors and provides you some protection from increases in tax and interest and penalties. However, even if there is a PR, you will need to know whether the actual scheme is being implemented in accordance with the ATO ruling. If not, you may not protected from additional tax, interest or penalties.
These schemes tend to operate in the fields of agribusiness, property and shares (or their derivatives).
Gearing investments
This can be a more tax effective option than contributing to super. Borrowing to invest enables you to access deductions for interest paid on the investment loan and also provides more capital to invest. Of course, you will have to ensure that the returns on investments made in this way will, in the long term, exceed your interest costs – and be alert to the fact that whilst gearing can magnify the return on investment, it can also magnify the capital losses in a ‘down-turning’ market. A Note of Caution: an appropriate investor risk profile should be affirmed before entering into this type of investment strategy.
Wanting more information about potential strategies to achieve early retirement?
Continuum Financial Planners Pty Ltd has a number of experienced advisers available to help you determine the most appropriate strategy for achievement of your financial security goals (and that early retirement – or indeed any major lifestyle transition that carries a financial cost). To access an obligation-free appointment with one of our team, Contact Us through our website, or call our office on 07 3421 3456.
(1) Superannuation rules are set under the Superannuation Industry Supervision – or SIS – legislation.
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(Originally posted in July 2011, this article has occasionally been refreshed, most recently in January 2019)
