What Does Transition to Retirement Mean?

After dedicating years to your career, it’s natural to crave the rewards of your efforts. But the idea of abruptly shifting from full-time work to complete retirement might feel daunting. If you’re not quite prepared for such a drastic change, that’s where transitioning to retirement comes in.

What does Transition to Retirement mean?

A transition to retirement allows you to keep working and still drawdown funds from your superannuation fund once you have reached your preservation age, giving you the ability to reduce your working hours without having to cut back your expenses. It can give you the ability to ease into retirement, without having to make large and abrupt changes to our life.

Moreover, transitioning to retirement allows individuals to ease into this new phase of life at their own pace. It provides an opportunity to explore hobbies, spend time with family, and pursue personal interests while still having the structure and routine of work to some extent. This balanced approach fosters a smoother transition and can contribute to overall well-being and fulfilment.

Can I save tax with a Transition to Retirement?

Implementing a well-structured transition to retirement plan doesn’t just ease the financial burden—it can also lead to significant tax savings. Even if you haven’t cut back on your working hours, having a strategic approach can be advantageous, especially once you reach 60 years of age.

At 60, withdrawing funds from your superannuation becomes tax-free. This presents a valuable opportunity for those still earning an income. By directing additional funds into superannuation through salary sacrifice, you’ll be taxed at the concessional superannuation rate of 15%, which is typically lower than your marginal tax rate.

Furthermore, you can supplement your reduced income by utilising the Transition to Retirement feature of your superannuation. Withdrawals from this account are exempt from tax, providing an additional tax-saving avenue. This strategy effectively reduces your tax rate from your marginal rate to a flat 15%.

However, it’s crucial to approach this strategy with caution. Ensuring compliance with the maximum limits on concessional superannuation contributions and pension drawdown limits is essential to avoid any penalties or adverse tax implications. By navigating the transition to retirement strategically, you not only optimise your finances but also pave the way for a smoother transition into retirement.

Transitioning to retirement provides a practical and strategic approach to managing the shift from full-time work to retirement. It offers financial stability, a smoother adjustment period, and opportunities for personal growth and fulfilment during this significant life transition.

A financial advisor can guide you through the myriad of complexities around transitioning to retirement.

To find out if any of these strategies are right for you, feel free to contact 360 Financial Strategists online or on 03 9427 0855.