Sunday, June 7, 2015

Wealth Projector: To TTR Or Not To TTR?

Transition to Retirement (TTR) is a strategy whereby individuals (who meet certain criteria) can draw down portions of their superannuation savings (up to 10% per year) before they reach retirement age.

There are several reasons a person may want to do this. Firstly, they may want to reduce their working hours in order to enjoy more leisure time. They can use the drawdown from their super to 'top up' the salaried income they lose. Another popular, if counter-intuitive, idea is to take the money drawn down from super and immediately reinvest it back into super. Because of various tax rules, this can actually increase overall income. In a third scenario, a person may elect to take their drawn down superannuation and use it to accelerate their mortgage repayments.

Which of these scenarios is most appropriate for an individual depends on a number of factors. For example, most commenators would recommend against using TTR to repay your mortage if you have other, more pressing, debts such as credit cards:

"if your mortgage interest rate is 6 per cent and your credit card interest rate is 16 per cent, it simply makes sense to pay off the debt with the highest interest rate".

Equally, in some cases having a mortgage can actually be beneficial, such as a negatively-geared investment property. Other commenators point out repaying mortgages using TTR "may mean missing out on potential capital growth and high earnings if markets were to perform strongly". Finally, assuming no health problems, it may make sense to hold off on TTR and wait until you can access all of your superannuation tax-free at retirement.

In many ways, using TTR to pay down a mortgage is the most conservative, risk-adverse choice. Assuming you don't already have worse debts (i.e. credit cards), the other reasons for not paying down a mortgage revolve around trying to make better returns elsewhere. Investing in rental properties, betting on market returns, and betting on medium-term health, are inherently riskier to varying degrees.

Ultimately there's not a clear answer as to whether a person should adopt TTR or not.

Where there is a clear answer, however, is whether a person should be educated about TTR. It's been observed that fewer than 40% of Australians have sought financial advice. This has serious implications for the adoption of TTR, which is not as widespread as it could be. For such an important, and potentially beneficial strategy, TTR is under utilised.

No long-term wealth projection would be complete without considering TTR. For financial planners, having TTR front-and-centre in an educational tool is an excellent conversation starter, whether a person ultimately adopts it or not.