The superannuation is super for good reason. At the end of September 2020, assets totalled almost three trillion dollars. Super accounts provide important supplies of money to retirees, increasing their quality of life.
But super accounts can’t do all of that on their own. Despite the massive amount of money in supers, many retirees struggle to make ends meet. This is often because they didn’t spend much time preparing for retirement.
If you start retirement planning today, you can avoid other peoples’ mistakes. You can start right here. Here is your guide on how to avoid five common mistakes in retirement preparations.
1. Not Being Aware of Entitlements to Pensions and Benefits
You can qualify for the Age Pension when you turn 66. The eligibility age may rise to 67, so be aware of the laws.
To claim your pension, you must have Australian residency. Plan out in advance how your Age Pension will benefit your retirement.
Factoring in supplements, you can receive $944.30 every two weeks as a single person. If you are in a relationship, you can receive $711.80 every two weeks and pool money with your partner.
You should set savings aside. You may not receive the full pension, and the full pension may not be enough money to live off of.
Growing your super can help. Salary Sacrifice directs your salary into your super while being taxed at 15 per cent. You have a cap on pre-tax contributions up to $25,000, but this money can make a real difference when you’ve retired.
You can access your super and have an Age Pension. But the more assets in your super, the less of a pension you will receive.
You should still try to apply for one. It can give you cheaper vehicle registration and rebates on electricity.
If you don’t qualify for an Age Pension, you can apply for the Commonwealth Seniors Health Care Card. This will give you a number of medical benefits, including cheaper prescriptions.
Benefits are capped based on income. If you’re single and you earn more than $55,808 a year, you cannot receive the Care Card. But if you earn less than that, you should absolutely apply for it.
You can apply for these benefits through Centrelink. Take your time filling out your application. It can be difficult, but the end result is a very comfortable retirement.
2. Not Planning Your Estate
You should make sure your will and estate plans are in order well before you retire. Your plans will change through time, so you don’t want to be too rigid. But you should have some idea about how you want financial managers to allocate your funds after you die.
Start growing your estate right now. Save more than the minimum. Take advantage of investment programs that will grow your earnings.
You can draft a will as soon as you turn 18. Write a will with professional help.
Detail the assets you own in as clear detail as possible. Appoint an executor, then name who should get what. If you want to exclude someone from receiving a part of your estate, you should do so.
You can also state your funeral and burial wishes. You may want to set a little money aside specifically for your funeral. You can also name a charity you want to give money to.
In regards to your superannuation, it is not enough to say how you wish for others to distribute it. You need to have binding death benefit nominations (BDBN).
These are statements made in writing that are sent to your fund’s trustees. You must update them every three years.
If you do not have a will or BDBN, courts will appoint an administrator to distribute your estate. It may not go to the people you want. Your family members may file lawsuits against each other to receive funds.
Estate planning is essential to keep things calm after your death. You can always update your will and BDBN. But make the first draft as soon as possible.
3. Not Preparing Your SMSF to Pay an Account-Based Pension
A self-managed super fund (SMSF) is a private fund that you run and manage. You choose your own investments and insurance plans. You can have up to four members in your fund, and you can consult with financial advisors on how to manage it.
You should choose an SMSF if you are knowledgeable and experienced about finances. It takes a lot of work, but it will give you maximum control.
One step you should take with it is to create an account-based pension. You transfer money from your super into a pension account. The account pays out once you retire.
You can arrange whatever frequency of payments you want. The payments will continue until your account runs out.
An account-based pension is a smart choice for a dependable supply of money. You can start preparing for one right now.
Check to see if your trust deed allows for a pension. If it doesn’t, update your deed so it does.
Take value of your current super assets. Consider which ones you want to transfer into your pension account. You can keep some assets in your super for additional investment streams.
Filing for a pension requires a lot of paperwork, including a statement that you want a pension. If you get stuck, contact a financial advisor. Do not guess or put in incomplete information.
The more members there are in your SMSF, the more complicated the process is. Clearly delegate how you want the account to pay out your pension and who you want the money to go to.
Calculate exempt current pension income. This is money that is exempt from taxation. You can save thousands of dollars by doing this.
4. Not Reviewing Your Investment Strategy
It is important to plan ahead for retirement. But you don’t want to set everything in stone.
Men aged 65 today can expect to live another 20 years, while women aged 65 can expect to live 23. These numbers will go up with time. You need your super to last at least two decades, if not longer.
The best way to save up enough money is to start investing today. Participate in Salary Sacrifice and make additional personal contributions.
Develop a diverse investment portfolio. Have some assets in fixed income and cash but maintain some in equity and other growth programs.
Check in with your financial advisor at least once a year, if not more often. Talk about your investment options and compare a conservative plan to a balanced one. If your strategy is not working, change it right away.
You may have a super you lost or did not claim. Find it and consolidate your accounts together. You can save yourself thousands of dollars.
You do not have to compromise on your Muslim beliefs in order to grow your superannuation. You can follow Islamic investment standards, refraining from interest and investing in halal industries.
Conduct retirement planning with your financial advisor and dependents. Right before you retire, consult with your network on your next steps.
You can shift a small amount into fixed income, but you lose opportunities to grow your super with the more money you do shift. It is highly unlikely that you will be able to live off the income alone. You will also leave less inheritance for your dependents if you shift a lot of assets.
5. Not Managing the Superannuation Balance
There are several different caps for your super. Employer and personal contributions are capped at $25,000 per year. If your contributions exceed that limit, you will have to pay additional taxes.
Monitor how much goes into your super every year. You will lose money in taxes if you don’t keep an eye on it.
The transfer balance cap applies for supers with a balance of over $1.6 million. It is a cap on the amount that you can use to start a pension in retirement. If you use more than this amount, the state will tax you at 15%.
Be aware that once you retire, the ATO will make a transfer balance account in your name. If you start or stop a pension, you must report it to the ATO.
Use the cap to your advantage. It means you can create a diversified portfolio, combining your pension with other benefits. Multiple income streams will give you security if the economy downturns.
Preparing for Retirement the Smart Way
Preparing for retirement is a long and winding road. But you can avoid tumbling off of it.
Understand if you qualify for the Age Pension and Health Care Card. If you do, apply for them as soon as possible. Prepare a will with binding death benefit nominations that you renew through time.
Prepare your self-managed fund to pay an account-based pension. Review your strategy to compensate your pension with growth assets. Keep your balance below the caps to avoid paying taxes.
Get expert help. Crescent Wealth Super is Australia’s leading Islamic super investment fund. Contact our staff today.
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Talal currently serves as a Non-Executive Director on the Whitlam Institute and Western Sydney University Foundation Council Board. He also serves as Chairman of First Quay Capital and Chairman of the Australian Arab Dialogue. Talal has also served on the Australia Post, Board of Sydney Ports, Macquarie University and the Western Sydney Area Health Service and the Chairman of the Department of Foreign Affairs and Trade; Council of Australia Arab Relations. In an executive capacity, Talal spent 10 years at PwC as a director and strategist, and at investment firm Babcock & Brown in the Corporate Finance Group and later in the Technical Real Estate Division. Later Talal held leadership positions in Better Place Australia, Platinum Hearing and Star Transport Australia.