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 $59,000 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 $1.02 million in super[i]. Over time, inflation will push these figures higher. Leave retirement to age 65 and a couple will need around $79,300 a year[ii] from a nest egg of about $1.08 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 $80,000 and $180,000 per year, any income between those limits is taxed at 39%. 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 $2,880 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 $35,000 a year, the excess is added to your assessable income and taxed at your marginal tax rate. This will become even more important with the Budget proposal to lower this figure to $25,000 pa from 1 July 2017.
Once you reach your preservation age[iv] 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. Another incentive for starting a TTR pension is that once you reach 60, the income you receive and the earnings on the investments backing the pension are tax-free.
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 us to plan this out the better off you will be.
Sum required to fund an annual income of $59,000 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
Value of $59,000 today in 10 years at 3% inflation.
Sum required to fund an annual income of $79,300 for 20 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
Depending on your date of birth, your preservation age will be between 55 and 60. It is the age at which you can access your superannuation under certain conditions.