Opinion
I want to retire early. How do I plan for this financially?
Paul Benson
Money contributorI am 43, newly single, with shared care for an 11-year-old. I have a $550,000 mortgage, fully offset. I’ve got $345,000 in super in a high-growth allocation. Separately, I have $85,000 of ETFs and $140,000 in savings. I have no debts. I’m in a well-paid job (circa $210,000) which I’m looking to leave to start my own consultancy business in the next 12 to 18 months, which would involve a significant pay cut. I’d also like to relocate in 10 years to a small regional town where I can work from home and taper off the need for full-time work.
I’m not certain how to best set myself up for this goal financially? Should I be looking at an investment property using my available cash as a deposit or continue to invest in equities (either through direct investments or upping my super contributions)? I’d also like to start a 10-year insurance bond for my child to help her with getting a deposit for her first home.
Great to have that clarity on your goals, this is an essential first step to successful financial planning. I suggest you reflect on the prioritisation of these goals. Is it as you have listed them here? I often find that the order goals come out of people’s head does not reflect the actual order of priority.
Prioritisation is important here, as making a career change that results in your income halving pushes against the achievement of your relocation and retirement goals, and also provides less for the investment for your child.
Ideally, you would get some financial modelling done to understand how the goals of career change, tree change, and semi-retirement/full-retirement will mesh. This might also inform how aggressive you need to be with your investment strategy.
Given all of your goals are to occur before age 60 it would seem to me that accumulating wealth outside of super makes the most sense. You are currently in the top marginal tax rate, so you could consider negative gearing if that aligns with your risk appetite, though this would be less attractive post your career change.
Note that this need not be property, where the risk is magnified by holding a single asset and therefore a single tenant. You have experience with share investing. Perhaps you use some equity in your home to gear here. The diversification possible would significantly reduce the risk, provided you have a 7-year plus (ideally 10-year) time frame.
Note that with the insurance bond, whilst there is typically no additional tax that needs to be paid once held for more than 10 years and sold, this does not mean no tax is payable overall. Insurance bonds pay tax on their earnings at 30 per cent. Whilst your income is at its current level, this would be attractive, but perhaps it is less so after your career change.
I am confused with personal tax-deductible contributions. Everything I read is not clear on this subject. Can you please clarify if you can make tax-deductible contributions after your total superannuation balance exceeds $1.9 million? If so, I presume you can make up to $27,500.
What happens after your 67th birthday? Can you still claim a tax deduction for personal contributions of $27,500, if your total superannuation balance is greater than $1.9 million?
The $1.9 million pension transfer balance cap has no implications when it comes to you making concessional (ie tax deductible) contributions. You do want to be careful though that there is no reason for it to be reclassified as non-concessional.
This could occur for instance if claiming the deduction for the contribution would result in you having an overall tax loss, or if you failed the work test. Non-concessional contributions are not permitted for those with balances over $1.9 million.
You can make concessional contributions up to age 75, however beyond age 67 a work test does need to be satisfied. This work test is only applicable for tax deductible (concessional) contributions.
To satisfy the work test, you need to have been gainfully employed for at least 40 hours in any period of 30 consecutive days during the income year in which the contribution was made.
Paul Benson is a Certified Financial Planner. Questions to: paul@financialautonomy.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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