Strategy Talk | January 2019
No matter if you’re in your 20s, 30s, 40s, 50s or 60s, it’s important that your superannuation strategy is considered and optimised. This month in Strategy Talk we’re breaking down the decades with a series of scenarios and considerations. Remember, it’s never too early or too late to optimise your super!
SUPER IN YOUR 20S. BORING? DOESN’T HAVE TO BE!
Superannuation is for the oldies, right? In some ways that’s true, but even in your twenties there are good reasons to take a bit more interest in your super. The average 25-year-old has around $10,000 in super, but the decisions you make now, even with relatively small sums of money, could earn you hundreds of thousands of extra dollars over your working life.
Are you getting any?
Earn more than $450 in any given month (excluding overtime, bonuses and some allowances)? Then every three months your employer should be paying 9.5% of that into your super fund. Usually you can choose your fund; if you don’t, it gets paid into a super fund of your employer’s choice. But that doesn’t mean you don’t get a say in how it’s invested.
If you don’t know if your super is being paid, or the fund it’s being paid into, ask your employer. If you think you’re missing out, search ‘unpaid super’ on the tax office website (ato.gov.au) to see what you can do. This is your money.
Where have you got it?
Had more than one job? If you have a lot of little super accounts the money can disappear in a puff of fees and insurance premiums. Simple fix - combine your super into one account.
What about insurance?
If you don’t have any dependants, your super fund could be paying for insurance you don’t really need just yet. Cancelling unnecessary life insurance leaves more money in your account to boost your savings. On the other hand, if you do need life or disability insurance, then doing it through super could be a better option.
Is it working for YOU?
Your money is going to be stuck in super for a long time, so you want it to be working hard for you. Most funds offer a range of investment choices and some will do better than others.
Imagine your income and super contributions follow a particular pattern over the next 42 years[i]. Your fund earns 5% per year, and when you retire it is worth $1,037,154. Now change just one thing – you choose an investment option that earns 8% each year. Now your balance could grow to over $2,000,000! That’s nearly a million bucks extra, just for ticking a different box on your super fund application form!
There’s a bit more to it. An investment choice that is expected to produce higher returns over the long term can bounce up and down in value. Some years it may even go backwards in value. However, “safer” investment options usually produce lower long-term returns.
What do you want?
Buying a new car. Travelling, Having fun. Let’s face it, there are lots more exciting things to do with your money than sticking it into super. The choice is yours but think about this:
If Mum and Dad retired this year, they would need a minimum of around $60,600 per year to enjoy themselves[ii]. If that doesn’t sound like much now, by the time YOU retire inflation could have pushed that annual amount to around $209,718[iii]. That means you will need to have at least $3.6 million[iv] in savings! Sure you’ve got 40-plus years but that’s still a lot of money to save up! It can be done if you start early enough – and you don’t need to miss out on enjoying life now.
Fact: you’re going to live much longer than your parents and grandparents. Can you imagine living another 30 years without earning an income? A sound investment plan designed to make your super work hard while you’re employed will be the difference between enjoying those decades and scraping by on a measly pension.
Starting early and adding a bit extra when you can makes a big difference. Let’s work on another 40 years before you can retire. If you start now by making an extra post-tax contribution of just 1% of your annual income to super, ($350 from a $35,000 salary – and the government could add to that with a co-contribution[v]) at an 8% investment return could add an extra $149,000 to your retirement fund. If you wait 20 years before starting to make that extra contribution, you’ll only get a boost of $49,000. $100,000 less! Continuing this small extra contribution as your salary increases will turbo boost your super fund balance. Imagine your retirement party?!
So, still find super boring? That’s okay; you’re not alone. But instead of finding the time to organise all this yourself, you can contact us to review your current super, any insurance required, the investment choices and prepare a strategy to get your super into shape – then you can get back to enjoying life!
[i] Starting salary $50,000 pa increasing at 4% pa over 42 years. Super contributions fixed at 9.5% of salary and taxed at 15%. Investment returns before inflation but after tax and fees.
[ii] Income required to provide a couple with a “comfortable” level of income as calculated by The Association of Superannuation Funds of Australia (ASFA) (September 2018)
[iii] Value of $60,600 today in 42 years at 3% inflation.
[iv] Sum required to fund an annual income of $209,718 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
[v] The government makes a co-contribution to super for low income earners under $52,697 (2018/19).
SUPER IN YOUR 30S. IT’S IMPORTANT TO SQUEEZE IT IN.
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 $156,060 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 $2.7 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 us about putting a plan into place so you can have everything now – and in 30 years’ time.
[i] Value of $60,604 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) (September 2018) – in 32 years at 3% inflation.
[ii] Sum required to fund an annual income of $156,060 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
SUPER IN YOUR 40S. IT’S TIME TO GET FOCUSED.
Typically your forties is a time of established careers, teenage kids and a mortgage that is no longer daunting. There are still plenty of demands on the budget, but by this age there’s a good chance there’s some spare cash that can be put to good use. As you pass the halfway mark of your working life, it’s time to give retirement planning a bit more attention.
How much?
A 45-year-old today will reach ‘retirement age’ in 22 years. Taking inflation into account a couple will, by then, need an income of around $116,123 per year if they want to enjoy a ‘comfortable’ retirement.[i] With the government expecting us to be self-sufficient in our old age, the nest egg required to fund that lifestyle could over $2 million[ii]. So, what can you do to have $2 million waiting for you in two short decades’ time?
A beneficial sacrifice
At this age, a popular strategy for boosting retirement savings is ‘salary sacrifice’ in which you take a cut in take-home pay in exchange for additional pre-tax contributions to your super. If you are self-employed, you can increase your tax-deductible contributions, within the concessional limit, to gain the same benefit.
Salary sacrificing provides a double benefit. Not only are you adding more money to your retirement balance, these contributions and their earnings are taxed at only 15%. If you earn between $90,001 and $180,000 per year that money would otherwise be taxed at 39%. Sacrifice $1,000 per month over the course of a year and you’ll be $2,880 better off just from the tax benefits alone.
It’s important to remember that if combined salary sacrifice and superannuation guarantee contributions exceed $25,000 in a given year the amount above this limit will be added to your assessable income and taxed at your marginal tax rate.
What about the mortgage?
Paying the mortgage down quickly has long been a sound wealth-building strategy for many. Current low interest rates and the tax benefits of salary sacrifice, combined with a good long-term investment return, means that putting your money into super produces the better outcome in most cases.
One caveat - if you think you might need to access that money before retiring don’t put it into super. Pay down the mortgage and redraw should you need to.
Let the government contribute
Low-income earners can pick up an easy, government-sponsored, 50% return on their investment just by making an after-tax contribution to their super fund. Not surprisingly, there are limits[iii], but if you can contribute $1,000 of your own money to super you could receive up to $500 as a co-contribution.
Another strategy that may help some couples is contribution splitting. This is where a portion of one partner’s superannuation contributions are rolled over to the partner on a lower income. Your financial adviser will be able to help you decide if this strategy would benefit you.
Protect what you can’t afford to lose
With debts and dependants, adequate life insurance cover is crucial. Holding cover through superannuation may provide benefits such as lower premiums, a tax deduction to the super fund and reduced strain on cash flow. Make sure the sum insured is sufficient for your needs as default cover amounts are usually well short of what’s required.
Also look at insurance options outside super. They may provide you with greater flexibility, such as level premiums, which might be better value in the long run.
Finally, review your superannuation death benefit nominations to ensure they remain relevant. You can make binding nominations that may see your dependants receive their benefit more quickly than waiting for probate to take its course.
Seek professional advice
The forties is an important decade for wealth creation with many things to consider, so ask us to help you make sure the next 20 years are the best for your super.
[i] Value of $60,604 today – the income calculated to provide a couple with a “comfortable” level of income as calculated by The Association of Superannuation Funds of Australia (ASFA) (September 2018) – in 22 years at 3% inflation.
[ii] Sum required to fund an annual income of $116,123 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
[iii] The super co-contribution high income threshold for 2018-19 is $52,697.
SUPER IN YOUR 50S. IT’S TIME TO PUSH THE PEDAL DOWN!
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 $60,604 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 $1.05 million in super[i]. Over time, inflation will push these figures higher. Leave retirement to age 65 and a couple will need around $81,446 a year[ii] from a nest egg of more than $1.1 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 $90,001 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 $25,000 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 financial adviser, the better your chances of having more when you reach the finishing line.
[i] Sum required to fund an annual income of $60,604 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
[ii] Value of $60,604 today in 10 years at 3% inflation.
[iii] Sum required to fund an annual income of $81,446 for 20 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
SUPER IN YOUR 60S. IT’S STILL NOT TOO LATE!
For most Australians, their 60s is the decade that marks retirement. For some this means a graceful slide into a fulfilling life of leisure, enjoying the fruits of a lifetime of hard work. However, for many it means a substantial drop in income and living standards. So how can you make the most of the last few years of work before taking that big step into retirement?
Are we there yet?
Allowing for future age pension entitlement the Association of Superannuation Funds of Australia (ASFA) calculates that a couple will need savings of $640,000 at retirement to maintain a ‘comfortable lifestyle’[1].) ASFA equates ‘comfortable’ to an annual income of $60,604.)
How are we tracking as a nation?
In 2015-2016, 50% of men aged 60-64 had super balances of less than $110,000. For women the figure was a more alarming $36,000 – not even enough to provide a single person with a ‘modest’ lifestyle. (ASFA estimates that to upgrade from a ‘pension only’ to a ‘modest’ lifestyle would require a retirement nest egg of $70,000.)
Last minute lift
If your super is looking a little on the thin side there are a few ways to give it a boost before retirement.
Make the most of your concessional contributions cap. Ask your employer if you can increase your employer contributions under a ‘salary sacrifice’ arrangement. Alternatively, you can claim a tax deduction for personal contributions you make. Total concessional contributions must not exceed $25,000 per year, although from July 2018 you may be able to carry forward any unused portion of this cap for up to five years.
Investigate the benefits of a ‘transition to retirement’ (TTR) income stream. This can be combined with a re-contribution strategy that, depending on your marginal tax rate, can give your retirement savings a significant boost.
Review your investment strategy. A common view is that as we near retirement our investments should be shifted to the conservative end of the risk and return spectrum. However, in an age of low returns and longer life expectancies, some growth assets may be required to provide the returns that will be necessary to support a long and comfortable retirement.
Make non-concessional contributions. If you have substantial funds outside of super it may be worthwhile transferring them into the concessionally taxed super environment. You can contribute up to $100,000 per year, or $300,000 within a three-year period. A work test applies if you are over 65.
The 60s is often a time for home downsizing. This can free up some cash to help with retirement. The ‘downsizer contribution’ allows a couple to jointly contribute up to $600,000 to superannuation without it counting towards their non-concessional contributions caps.
Bye-bye tax, hello aged pension?
One reward, just for turning 60, is that any withdrawals from your super account will be tax-free. This applies to both lump sum withdrawals and income stream payments. Depending on the preservation status of your funds you may need to meet a condition of release to access your superannuation.
Based on your date of birth, somewhere between age 65 and 67 you’ll reach age pension age. The age pension is subject to both an assets test and an income test and some advanced planning can boost your eligibility for the pension. For example, the family home is exempt from the assets test. Releasing cash by downsizing may reduce your eligibility for the age pension.
Get it right
This important decade is when you will make the key decisions that will determine your quality of life in retirement. Those decisions are both numerous and complex.
Quality, knowledgeable advice is critical, and wherever you are on your path to retirement, now is always the best time to talk to us.
[1] As at June 2018