Ask an Adviser: Too old to start again, too young to retire. David’s $3.5 million problem explained

Redundancy at 53 is not retirement. But for David, a divorced single father whose children are now adults, it might be close enough. But do the numbers stack up?

David spent the better part of two decades building a substantial financial position: a $2.3 million home paid off in full, $2.37 million in a self-managed super fund and $1.1 million in an employee share scheme he accumulated through a senior role at a large ASX company. Then his employer merged with an international group, and his role disappeared with it.

There are few good times for redundancy (when you are already planning on quitting is the only one that jumps to mind), but at 53 David is still seven years from his superannuation preservation age of 60, meaning the bulk of his wealth is locked away for nearly a decade.

He’s old enough that returning to a comparable role would be genuinely difficult but young enough that a sudden retirement stretches his capital much further than any planning had assumed. It essentially lands in whatever the opposite of the Goldilocks zone is.

His question is deceptively simple: does he have enough to retire now, or does he need to go back to work? Here to help answer that question is Viola Private Wealth’s Daniel Todorcevski.

The situation

• Male, 53, single (divorced about 10 years ago)
• Two adult children, aged 24 and 22
• Primary residence: $2.3 million, mortgage free
• SMSF: $2.37 million
• Employee share scheme (personally held): $1.1 million, generating approximately $30,000 in net dividends including franking credits
• Annual expenses: $140,000
• Former salary: $400,000

Goals:

• Live off $140,000 per annum, adjusted for inflation, without depleting his capital base.
• Leave a meaningful inheritance for his children without eroding the entire capital base.
• Avoid downsizing his home unless absolutely necessary.

The three options

Todorcevski worked through three distinct paths for David, each with their own set of trade-offs.

Option 1: Return to work

The clearest path to financial certainty for David is to secure another role. Even if this took the form of part-time or consultancy work with reduced pay of $150,000 a year, it would allow him to continue accumulating rather than drawing down, protecting the capital base and reducing the risk of running short later in retirement.

The problem is the human reality of this option. David believes finding comparable work would be difficult given his specific role and age and starting a new job only to leave it in five to seven years would also involve real stress and disruption at a time when he would prefer to be transitioning out of the workforce, not into a new version of it.

As Todorcevski puts it, this option is “undesirable and he would rather retire if able to do so”.

Option 2: Live off the ESS shares until 60, then access super

Retiring earlier than planned is always hard but David is in a strong position, so drawing down on the employee share scheme to fund living expenses until preservation age is doable.

The ESS holding of $1.1 million, generating $30,000 in net dividend income annually, would not be sufficient to cover $140,000 in annual expenses. The shortfall would need to be funded through selling down shares progressively, which “runs the risk of depleting capital too early”.

“This may result in not having sufficient capital to live off in the later years and may prohibit the goal of leaving a legacy to children,” Todorcevski says.

However, the modelling suggested this was workable: with careful drawdown management, David would arrive at age 60 with approximately $500,000 still remaining from the ESS portfolio, while his SMSF balance continues to compound, untouched, for seven years.

There is also the potential for sequencing risk in the event of material market drawdown when dependent on super savings, with the ESS also representing significant concentration risk given it is the bulk of his investible assets outside super and comprises just two stocks that vested as part of his redundancy package.

Option 3: Downsize the family home

Selling the $2.3 million primary residence and purchasing a smaller apartment for approximately $1.5 million would free up around $800,000, while also enabling a $300,000 downsizer contribution into superannuation for those aged 55 and over. Combined, this would provide a meaningful financial buffer through to preservation age and well beyond.

The problem is that David loves his home and “really doesn’t want to move out and downsize unless it is a necessity in order to reach goals and objectives”.

The recommendation

After working through the modelling and David’s priorities, Todorcevski recommended Option 2.

The ESS capital is sufficient to bridge the gap to preservation age, provided David is disciplined about the drawdown rate. The vesting of shares as part of the redundancy package could also be the perfect time to reassess that concentration.

At 60, David’s SMSF becomes accessible and transitions to pension phase after compounding untouched for seven years, providing the sustainable income stream needed to fund $140,000 per year indefinitely. The modelling supports this position leaving a substantial inheritance for his children rather than depleting the capital base.

“The income will not be sufficient so a selldown of the shares will be required. However, this will leave him with approximately $500,000 still remaining at preservation age, which also greatly de-risks his personal balance sheet,” Todorcevski notes.

“He also doesn’t have to sell his home, return back to the workforce and is very likely to provide a material inheritance for his children.”

The bottom line

The superannuation preservation age creates a structural challenge for anyone who retires involuntarily before 60. The bridge strategy that uses personally held assets to fund living expenses until access to super requires careful modelling of drawdown rates, sequencing risk and the tax treatment of share sales.

The downsizer contribution is an option worth modelling for anyone over 55 who owns a primary residence. The value of remaining in his home outweighed the benefits in David’s case, but the $300,000 additional super contribution it enables can materially improve retirement outcomes for those who do need to downsize.