This is the second article in the 4-part series on superannuation through the generations. It covers super for the short and long term, options to increase the balance, how much might be needed to retire on in 30 years’ time and ways to achieve it, and insurance through super.
If you are in your thirties, chances are life revolves around children and a mortgage. As much as we love our kids, the fact is they cost quite a lot. As for the mortgage, this is the age during which repayments are generally at their highest, relative to income. And on top of that, one parent is often not working, or working only part time. Even if children aren’t a factor, career building is paramount during this decade.
Are you really expected to think about super at a time like this?
Well, yes, there are a few things you need to pay attention to.
Short-term plans
As careers start to hit their strides, the thirties can be a time for earning a good income. If children are not yet in the picture, but are part of the future plan, then it’s an excellent idea to squirrel away and invest any spare cash to prepare for a drop in family income when Junior arrives. Just remember that any savings you want to access before retirement should not be invested in superannuation.
Long-term comfort
Don’t be alarmed, but by the time a 35-year-old couple today reaches retirement age in 32 years’ time, the effects of inflation could mean that they will need an income of about $159,420 per year to enjoy a ‘comfortable’ retirement[i]. To support that level of income for up to 30 years in retirement they will want to have built a combined nest egg of about $2.76 million![ii]
If you are on a 30% or higher marginal tax rate, willing to stash some cash for the long term, and would like to reduce your tax bill, then consider making salary sacrifice (pre-tax) contributions to super. For most people super contributions and earnings are taxed at 15%, so savings will grow faster in super than outside it. For example, if you’re earning $100,000 per annum, making a contribution of $10,000 from salary to super will save you paying $3,900 in income tax for that year – and increase your super balance by $8,500.
Growing the nest egg
Even if you can’t make additional contributions right now there is one thing you can do to help achieve a comfortable retirement: ensure your super is invested in an appropriate portfolio. With decades to go until retirement, a portfolio with a higher proportion of shares, property and other growth assets is likely to out-perform one that is dominated by cash and fixed interest investments. But be mindful: the higher the return, the higher the associated risk.
Another option for lower income earners to explore is the co-contribution. If you are eligible, and if you can afford to contribute up to $1,000 to your super, you could receive up to $500 from the government. Or to keep your partner’s super humming along while she or he is earning a low income, you can make a spouse contribution on their behalf and gain a tax offset of up to $540.
Let your super pay for insurance
For any young family, financial protection is crucial. The loss of or disablement of either parent would be disastrous. In most cases both parents should be covered by life and disability insurance.
If this insurance is taken out through your superannuation fund the premiums are paid out of your accumulated super balance. While this means that your ultimate retirement benefit will be a bit less than if you took out insurance directly, it doesn’t impact on the current family budget. However, don’t just accept the amount of cover that many funds automatically provide. It may not be adequate for your needs.
Whether it’s super, insurance, establishing investments or building your career, there’s a lot to think about when you’re thirty-something. It’s an ideal age to start some serious financial planning, so talk to a licensed financial adviser about putting a plan into place so you can have everything now – and in 30 years’ time.
Sources:
The Association of Superannuation Funds of Australia Ltd – ASFA Retirement Standard http://www.superannuation.asn.au/resources/retirement-standard/
Referenced notes:
[i] Value of $61,909 today – the income required to provide a couple with a “comfortable” level of income as calculated by The Association of Superannuation Funds of Australia (ASFA) (June 2020) – in 32 years at 3% inflation.
[ii] Sum required to fund an annual income of $159,420 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
