AYB250 - PERSONAL FINANCIAL PLANNING Tutorial Solutions Topic 8 - Retirement Planning 1. The federal government insists that individuals in pension mode must draw a minimum pension income. Why? Once an individual is over 60 years of age and in pension mode this means that all earnings inside the superannuation fund are tax free and all income (except income generated from untaxed superannuation money) is tax free. This generous tax environment is provided in the expectation that individuals will use this money to fund their retirement - the minimum draw down levels force individuals to use this money. The generous pension mode tax concessional environment is not meant to be a place where relatively wealthy individuals can simply park money in order to provide larger inheritances to their beneficiaries at the expense of the general taxpayer. In addition, as a person draws down on their superannuation, the balance will decreased. Thus, in order to maintain a similar standard of living, they would require a greater proportion (percentage) of the balance as the balance is depleted. 2. Jennifer, who is 59, is approaching retirement and wants to know how much superannuation she needs to retire comfortably. She has decided on a retirement income of $60,000 for 20 years. a) Using the present value formula, how much would Jennifer need to accumulate in superannuation in order to fund her retirement, assuming a real rate of return of 4%? PV = PMT x 1- (1 + r) -n r PV = $60,000 x 1- (1 + .04 ) -20 .04 PV = $815,420 b) Jennifer currently has a superannuation balance of $600,000. She has decided she could work for another 2 years, but at that point would like to retire. She believes she could contribute an additional $100,000. What advice could you give to Jennifer about her retirement plans? Jennifer will not have saved enough to meet her requirement in order to draw an income of $60,000 for 20 years. There are three things that can be adjusted in terms of retirement: · When to retire AYB250 Personal Financial Planning Topic 8 Tutorial Solutions -1-
· Contributions · Income in retirement Therefore, Jennifer could either retire later, contribute more (if she is able) over the next two years, or have a reduced income in retirement. 3. What are the taxation advantages of commencing a pension in a superannuation fund? All pensions paid from a taxed source, such as a private sector superannuation fund, to persons aged 60 or over after 1 July 2007 are tax free. However, for those who are under 60, the pensions are taxable and may qualify for a 15% tax offset. Taxable pensions paid from untaxed sources (for example, some types of public service pensions) to a person who is older than 60 are eligible for a tax offset equal to 10% of the untaxed element of the taxable component of the pension. Where a person under age 60 receives a taxable pension from an untaxed source, it is