The last article in the series of super through the generations explains what to do to improve super balances in potentially the last decade before having to rely on it. It covers salary sacrificing, TTR, investment focus and insurance, and a recommendation to seek professional advice soon.
If 50 really is the new 40, then life has just begun. The kids are gaining independence or may have left home, and the mortgage could be a thing of the past. Bliss. But galloping towards you is… retirement!
How are you tracking?
According to the Association of Superannuation Funds of Australia (ASFA), a ‘comfortable’ retirement today costs close to $63,352 per year for a couple. If you and your partner are planning to retire at 55, to afford this retirement lifestyle and secure your future, at least into your mid-eighties, you should be looking at having around $1.1 million in super[i]. Over time, inflation will push these figures higher. Leave retirement to age 65 and a couple will need around $85,139 a year[ii] from a nest egg of around $1.15 million[iii].
Find those numbers a bit daunting? Here are some ways to boost your retirement savings.
Increase your pre-tax contributions
You can ask your employer to reduce your take-home pay and make larger contributions to your super fund. If you are self-employed, you can increase your level of tax-deductible contributions. This strategy is commonly known as ‘salary sacrifice’.
If you are earning between $120,001 and $180,000 per year, any income between those limits is taxed at 37%. Salary sacrifice contributions to your superannuation fund are only taxed at 15%. Sacrificing just $1,000 per month to super will, over the course of a year, see you better off by $2,640 on the tax differences alone. Plus, the earnings on those super contributions will be taxed at only 15%, compared to investment earnings outside of super being taxed at your marginal rate.
Don’t overdo it though. If your salary sacrifice plus superannuation guarantee contributions add up to more than $27,500 this year, the excess is added to your assessable income and taxed at your marginal tax rate.
Retiring slowly
Once you reach your preservation age you might start a ‘transition to retirement’ (TTR) pension from your superannuation fund. The idea is to allow people to reduce working hours without reducing their income.
Keep your money working
There is a tendency to opt for more secure, but lower-return investments as we approach retirement. However, even at retirement your investment horizon may still be decades. With cash and fixed interest producing some of their lowest returns in history, it may be beneficial to keep a significant portion of your portfolio invested in growth assets.
Insurance and death benefits
With the mortgage paid off or much diminished and a growing investment pool, your insurance needs have probably changed. You may be paying for cover you no longer need, premiums may be quite high due to age, and that money might be better applied to boosting your savings. This is a good time to review your insurance cover to ensure it continues to be a match for your changing circumstances.
It’s also a good idea to check the death benefit nomination with your super fund. By making a binding nomination you can ensure that your death benefit goes to the beneficiaries of your choice, and may mean they receive the money more quickly.
Get a plan!
Superannuation provides many opportunities for boosting your retirement wealth. However, it is a complex area and strategies that benefit some people may harm others. Good advice is absolutely essential, and the sooner you sit down with a licensed financial adviser, the better your chances of having more when you reach the finishing line.
Sources:
The Association of Superannuation Funds of Australia Ltd – ASFA Retirement Standard http://www.superannuation.asn.au/resources/retirement-standard/
Referenced notes:
[i] Sum required to fund an annual income of $63,352 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
[ii] Value of $63,352 today in 10 years at 3% inflation.
[iii] Sum required to fund an annual income of $85,139 for 20 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
