Boomers, Gen X, Gen Y, Millennials – when does serious retirement planning start to germinate in the mind? It’s clear that super is not a hot topic for those just entering the workforce as they will have to wait at least to age 60 to access their retirement benefit (assuming future governments don’t increase the age for releasing super benefits). And for some younger workers, employer contributions into super just seem like lost wages when immediate needs such as housing, food, living expenses and children’s costs are pressing. It is a mandated retirement/pension system with compulsory savings for all workers in Australia with a long term horizon.
It seems that around 50 is the magic age when workers begin to think about it, but obviously the earlier individuals start to think about super, the more they can take advantage of tax concessions available. During the accumulation phase contributions are taxed at a flat 15% and investment earnings are taxed at a maximum of 15% (due to franking credits received by the super fund which reduce tax even further). This represents a strong incentive to invest in super. It’s even better in the super pension phase with tax free income for recipients over 60 and nil tax on investment earnings. It’s hard to beat these legislated tax concessions in the retail space.
Salary sacrifice helps boost super savings as these pre taxed contributions (along with employer contributions) are taxed at 15% rather than the marginal tax rate. Both salary sacrifice and employer contributions are subject to the current legislated limits which are $30,000 for anyone under 50 and $35,000 for anyone over 50.
Other strategies to help you achieve your retirement goals are increased savings, working longer, adjusting your investment mix to gain better returns (subject to your risk tolerance) and/or a transition to retirement pension. It is important to obtain personal financial advice prior to implementing these strategies as not all of them may suit you.
But what is the target for a comfortable retirement? The figures from ASFA (Retirement Standard December 2015) indicate that for a couple a comfortable annual income is $59,236 per annum while a modest income is $34,226. For singles a comfortable annual income is $43,184 and a modest annual income is $23,797. The underlying assumptions for these figures are that the couple or individual own their own home and that the figures relate to expenditure by the household.
And where will your income come from in retirement? It will generally be from super, non super investments such as shares, property and term deposits, social security and perhaps casual work. A figure which is sometimes quoted by financial planners is that retiring workers should aim to replace 70% of their pre retirement salary. Adequacy of savings will assist in determining quality of life in retirement and if achieved, retirees may have the longest holiday of their life rather than a struggle to make ends meet.
The main threats to achieving your retirement goals could be inadequate financial advice, poor investment decisions, overspending on the family home, retrenchment/redundancy, divorce and health problems since no one knows what is around the corner.
So as the Australian superannuation system grows, it is clear that members will focus more on the adequacy of their balances and start thinking about the practicalities of life after work. After all, you’ve worked for the system and the system should work for your glorious retirement and the earlier you understand it, the better!