This was published 7 months ago
Opinion
I’m close to retirement, should I de-risk my super?
Paul Benson
Money contributorI’m about two years away from retirement. Should I be reducing the level of risk in my super? Getting a bit nervous that there could be a big drop just as I’m about to retire.
Through until at least your early 50s, most people would benefit from being in the more aggressive investment options within their super fund, as these will produce the highest average return, albeit with plenty of volatility. Through this period, that volatility makes no difference, since you are unable to sabotage your long-term outcome by making withdrawals.
When you’re younger, having your super in riskier investment options makes sense. But that should change once you hit retirement age.Credit: Simon Letch
Once retired, however, the management of risk becomes far more nuanced. You need your superannuation savings to produce income, and this income needs to be reliable and predictable so that you know you have the funds available to put food on the table and pay your bills.
The portfolio composition of your superannuation in retirement needs to have a mix of stable elements, highly liquid elements and also long-term growth assets to ensure your savings last your lifetime.
We typically advise our clients to adjust their level of risk two to three years out from retirement. This might mean shifting the equivalent of three years living expenses into something more stable.
Should you be unlucky enough to retire at a time when investment markets are down, you have the confidence of knowing that you can live off that three-year pool of conservative money, providing plenty of time for your growth assets to recover in value before any need to be sold.
We own our home and have three investment properties worth $1.5 million with $180,000 debt. Should we be looking at selling one or more of the investment properties and rolling it into our super accounts before we turn 60, so it will be tax-free in the future instead of paying tax on the rent received?
It certainly makes sense to endeavour to have the bulk of your wealth within the superannuation system once in retirement if you can manage it. Once in the pension phase of the superannuation system, there is no tax on investment earnings, which is incredibly generous.
In recognition of these generous provisions, there are limits on how much can be contributed into super, and an overall limit on how much can go into a tax-free pension – currently $1.9 million per person.
If you and your spouse have room within these caps to get more of your wealth into the superannuation environment, that may well be a prudent move. In the scenario you’ve outlined here, however, to make those contributions, you need to sell an investment property, and that means capital gains tax needs to be considered as part of your strategy.
Because capital gains tax only becomes payable at the point that you sell the asset, you have considerable control over its timing. It would be sensible therefore to trigger this tax assessment in a year when your income from other sources is low. Most likely, the optimal time from a tax perspective to sell an investment property would be the first full financial year after you have retired.
This will mean a bit of back and forth with your superannuation accounts, first converting them to pensions, then once the property is sold, rolling back to accumulation, making super contributions, and commencing new pensions. Your financial planner will be able to assist you in making all this happen.
It is not necessary to get this done before age 60. You can contribute into super up to age 75.
Paul Benson is a Certified Financial Planner, and host of the Financial Autonomy podcast. 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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