How To Get $100k Per Year In Retirement – Tax Free – Guidance Financial Services
Today’s post is a big one: How to get $100,000 per year in retirement — tax free. Yes — tax-free. It sounds almost too good to be true. But with careful planning, the rules in Australia do allow for this outcome (for many). We’ll walk through how, when, and under what conditions.
I’ll be taking a look at:
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- The superannuation “pension phase” tax break,
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- How the transfer balance cap limits and enables tax-free income,
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- Strategy items you could use
Let’s dive in.
The superannuation “pension phase” tax break
Whilst you are working and contributing to your super fund, it is in what’s known as the “accumulation phase”. The accumulation phase receives favourable tax treatment, but there is still tax that’s paid. Where super really gets interesting though is when you shift to the next phase, known as the “pension phase”.
Once you convert your super balance into pension phase, earnings on the assets inside the pension are taxed at 0 % — there’s no tax on dividends, interest, or capital gains within that pension. And the pension income you draw is also tax free!
Once in the pension phase there is a minimum amount that you are required to withdraw each year. There is no maximum, so you have considerable flexibility here. The minimum is determined by your age. For people between 65 and 75 years of age, the minimum drawing is 5% of the balance. That being the case, in order to generate tax free income of $100,000 per year in this age bracket, you would want $2,000,000 in superannuation savings.
Transfer Balance Cap
The transfer balance cap is the upper limit on how much capital you can move into the tax-free pension phase. As of now, that cap is $2million per person. If you have a spouse and you split balances, a couple could potentially have $4 million in tax-free pension accounts. Structuring and planning for couples is crucial, as rarely is it the case that each member of a couple ends up with relatively equal balances unless some deliberate action is taken to make this so.
It’s worthwhile noting that the transfer balance cap is indexed over time; it will shift upward in future years.
Strategy items
$2million is a large amount to have in super, but it is an amount that may be within reach for high income earners with good planning. Here are some strategy options to help you get there:
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- Salary sacrifice / concessional contributions before retirement to build your super more efficiently (pay only 15% contributions tax). Your annual limit is $30,000 per year. Use it all.
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- Use the bring forward provisions to shift funds that are outside of super, into the super environment as you approach retirement. The maximum you can contribute in a single year is $360,000. Be sure to manage for CGT if you need to sell assets to make this possible.
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- Downsizer – each person can boost their super by $300,000 using the downsizer provision if they own a home for more than 10 years and make a move later in life.
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- Spouse splitting – this provides a way for a spouse with a high super balance to have their employer super contributions diverted to their spouse at the end of the financial year. Very helpful in managing the transfer balance cap.
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- Invest for growth – if retirement is still some time off, ensure your super portfolio is invested with a strong growth bias. Yes, it will experience volatility, but it will also get you to a larger final retirement balance, which then puts you on course for a generous tax free income.
Generating $100,000 per year of tax free income is possible for retirees in Australia. Indeed that amount is per person, so a couple could have doubled this. Our superannuation system is extremely generous, so make sure you’re making the most of the opportunities in this space.
If you’d like help modelling your numbers or building a custom plan, schedule a meeting here.
