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Tuesday, September 27, 2011

Early-age retirement can be hard!!

If you are thinking about early retirement you will need to establish an income source that is an alternative to your superannuation.

If you are planning to retire before you reach the age when you can access your superannuation benefits you need these alternative investments now to develop your (early) alternate retirement nest egg.

You can only access your superannuation benefits tax-free when you are aged 60 or above (to the extent it was taxed when it went into the fund). You may still be taxed on some superannuation benefits that you receive between age 55 and 60 but there is a component that you will still be able to withdraw tax free.

These superannuation rules pose the question: When can you access your super?

Your “preservation age” generally determines when you can withdraw your super. Your preservation age depends on your date of birth - age 55 if you were born before 1 July 1960 and phased up to age 60 if you were born after 30 June 1964.

Simply put, if you want to retire before 55 you need a non-super pool to fall back upon because you cannot access your super on your retirement. If you were born before 1 July 1960 the earliest you can plan to rely on your super savings is age 55.

If you were born after 1 July 1960 the earliest you can plan to rely on your super savings is phased in over 5 years and could be up to age 60.

A person aged 46 today (i.e., born after 1 July 1964) who wants to retire or work less before they turn 60 needs a non-super retirement plan.

So what are some tax effective investment options available to you now?

If you are saving for an early retirement, consider making investments for the long-term. Even plain vanilla investments such as shares or equity-based managed funds that pay/ distribute franked dividends/ distributions are tax effective for higher income earners since you will only be paying the top-up tax up to your marginal tax rate.

Other investments options include, for example:

Tax effective investment products that have an ATO Product Ruling.
You would probably be aware of the plethora of purported “tax effective investment schemes” in the marketplace. Be careful when deciding to invest in such a scheme and carefully assess the product disclosure information and the risks. It is very risky to invest in one of these schemes unless they have an ATO Product Ruling. This sets out the ATO’s view on the tax benefits that are available for investors and provides you some protection from increases in tax and interest and penalties.

However, even if there is a product ruling, you will need to know whether the actual scheme is being carried out in accordance with the ATO ruling. If not, you are not protected from additional tax, interest or penalties.

Gearing investments
This can often be a more tax effective option than contributing to super. Borrowing to invest enables you to get deductions for interest paid on the investment loan and also means that you have more capital to invest with. Of course, you will have to ensure that the returns on your investments in the long term will exceed you interest costs.

Continuum Financial Planners has a number of experienced advisers available to consult with you to determine the most appropriate strategy for you to achieve your financial security ambitions and goals for an early retirement – or indeed any major lifestyle transition that carries a financial cost. To access an obligation-free appointment with one of our team, at no cost for the initial meeting Contact Us through the website, or call Kathy on 07 3421 3456.

The information contained in this article is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek the appropriate financial advice and read the relevant Product Disclosure Statement or other offer document prior to acquiring any financial product.

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