Acquired Financial Planning

Case Studies

Basics of Retirement Case Studies

Case study 1: Making the transition to retirement

Judy is 55 years old and is currently working full time with no plans to change her employment arrangements. She wants to retire at 65. She has an annual salary of $70,000 and $400,000 in super. Assuming her 9% employer super contributions continue until she reaches 65, she’ll have around $641,892 in super by the time she retires, which will give her a minimum income of $32,090 pa in retirement.

After speaking to her financial adviser, Judy decides to implement a strategy that could significantly boost her retirement savings while having little impact on her day-to-day budget. She uses her $400,000 super balance to start a pre-retirement pension, drawing down the minimum payment allowed which, in her case, is $16,000 a year. This gives Judy more income than she needs, so she arranges with her employer to make additional contributions to her super from her pre-tax salary under a salary sacrifice arrangement. Her adviser works out exactly how much she needs to contribute to super through salary sacrifice so that her after-tax income is unchanged.

Even though Judy is still receiving the same amount of after-tax income as before, by implementing this transition to retirement strategy, she is able to increase her super balance rather than reducing it, helping her build valuable additional retirement savings.

By using this strategy, Judy could end up with almost $66,000 extra in her super fund by the time she turns 65. These extra funds could increase her minimum retirement income to around $35,380 pa.

Notes

This case study assumes: 7% pa earning rate; 2007–08 tax rates; minimum pension 5% of super balance at age 65.

Case study 2: Generating an income in retirement

Peter retires at age 60. He has $350,000 in super and decides he can live on an income of $27,500 pa during his retirement. Peter compares whether it would be more effective to draw this income using an allocated pension or through a non-super investment.

Using a non-super investment

Because Peter is 60 years old, he does not have to pay any tax when he withdraws his super, so his initial investment amount is still $350,000. However, Peter’s investment earnings and his regular income withdrawals would be taxed at his marginal tax rate. Peter would need to withdraw $32,262 pa to receive an after-tax income of $27,500 pa, meaning he would pay $4,762 pa in income tax (including the Medicare levy).

Using an allocated pension

As Peter is 60 years old, he can invest his total super balance of $350,000 in an allocated pension without having to pay any tax on its withdrawal from his super fund. In addition, due to his age, Peter would receive all pension payments tax-free. This means that to receive an after-tax income of $27,500 pa, he needs only to withdraw a pension payment of $27,500 pa. The net result is that Peter’s money will last longer if he uses an allocated pension, as shown in the graph below.

Notes

Source: Colonial First State. This table is for illustrative purposes only and does not represent actual or expected returns for any Colonial First State funds. The value of an investment can rise and fall over time. Investment returns are always affected by a number of factors, such as the type of investment you choose and your investment time frame, as well as economic and market conditions. A change in one or more of the variables or assumptions listed will produce different results.

Disclaimer

These case studies are for illustrative purposes only. They are not based on a particular person’s circumstances and are not personal advice. As this information has been prepared without considering your objectives, financial situation or needs, you should consider its appropriateness to your circumstances. You should seek assistance from your financial adviser before acting on this information. AIW Dealer Services ABN 59 153 322 420, AFSL 414256.

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