Some are mystified by super; others consider it simple. Fill the bucket during your working life and draw down on it during retirement. However, it does help to have a good understanding of the numbers so that you can put more in the bucket – all for a glorious retirement! Here are some relevant numbers that may assist your thinking:
- Compulsory employer contribution (Superannuation Guarantee): 9.5% of ordinary times earnings
- Tax on employer super contributions (including salary sacrifice): 15%, and
- CPI (to 30 September 2014): 5 years 2.5% (per annum).
Investment markets to 31 December 2014:
- Australian Shares (S&P ASX 300) five years 6.5% (per annum
- Australian Fixed Interest (Bloomburg AusBond Composite Bond Index): five years 7.3% (per annum)
- Australian Cash (Bloomburg AusBond Bank Bill Index): five years 3.8% (per annum), and
- Australian REITs (S&P/AX Property Accumulation Index: five years 12% (per annum).
ASFA Retirement Standard (September Quarter 2014):
- Annual expenditure (comfortable lifestyle): single $42,597 (per annum); couple $58,326 (per annum), and
- Lump sum required (assuming some Age Pension, 7% earnings): single, $430,000; couple, $510,000.
Lump sum tax rates for super withdrawals:
- Up to age 55: 20%
- Age 55 – 59: lump sum up to $185,000: Nil tax - excess over $185,000: 15% tax, and
- Age 60 and over: Nil tax.
Income tax rates 2014 – 2015:$0 - $18,200 Nil tax
- $18,201 - $37,000: 19%
- $37,000 - $80,000: 32.5%
- $80,000 - $180,000: 37%, and
- $180,000+: 45%.
Any conclusions? Clearly any earnings over CPI represent real growth to super balances and in terms of investment markets over the past five years, it looks as if property would have been a nice place to be (with the benefit of hindsight). Of course there is no guarantee of future performance.
Using the estimated lump sums required to produce a comfortable standard of living, it’s quite simple to gauge how much you need to contribute to reach that goal. Use one of the many calculators available from the ATO or your super fund. And of course it’s even better if you are over the estimated figure, icing on the cake.
The lump sum tax rates for super, assuming a condition of release is met such as a cessation of work, indicate clearly the benefit of accessing the super account only after age 60.
And the income tax rates when compared to the super contribution tax rate show the obvious advantage of salary sacrificing into superannuation for those who are over the tax-free threshold. For example, on a salary of between $37,000 and $80,000, any salary sacrifice payments represent a tax savings of 17.5%; for the next salary band ($80,000 - $180,000) any salary sacrifice contribution equals a 22% tax savings.
That’s why super is considered an excellent vehicle for retirement savings by financial planners. For those workers who are able to put a bit extra into super a significant tax savings is possible with the beauty of compounding investment earnings working their miracle – and the earlier, the better!