When meeting new clients one of the first questions we ask is what their goals are. We often hear that they want to ‘maximise Centrelink benefits in retirement’ or ‘minimise tax’. While these are important aspects of financial planning, these approaches are a means not an end.
Maximising Centrelink and minimising tax is great but it doesn’t tell me what your goals actually are and if you’re going to achieve them.After bit more digging we can usually clarify the most important goal as something like ‘retire at age 62 with a retirement income of $60,000 per annum net of tax, in today’s dollars’.If this is your goal and you retire with $1,500,000 I’ve got good news and bad news.The good news is that you will be able to meet your retirement income needs forever and a day, with a fair chunk to leave behind as well. The bad news is that you’ve got no chance of ever getting any Centrelink benefits.The same applies with tax savings leading up to retirement. If you’re on a high income we want to make sure we’re using this income in the most tax effective way e.g. salary sacrificing to superannuation.However there isn’t huge scope to minimise tax without actually getting rid of the money. Once again, the good news is that you should have a fair bit of spare cash flow to be able to grow your retirement savings in your last years of work.The bad news is that you are going to have to pay a lot in tax.Thus you find yourself faced with two choices:
- take a lower paying job to save tax, spend your retirement savings, and live on the Age Pension in retirement
- maintain a high income while working, pay the extra tax, and save enough to be a self-funded retiree… and say goodbye to Centrelink benefits.
This is a simplified description, and obviously we always want to minimise tax and maximise Centrelink as much as possible.But if it came down to one of these two choices… I’d personally prefer the latter.Written by Dallas Davison.