How to make sure you have enough super to retire on
August 6th, 2012
Many people are wondering how to power up their retirement nest egg now that the new superannuation regime of lower contribution caps has come into being.
It can still be done but it requires planning.
For those nearing retirement age, it may mean working longer or taking a closer look at disposable income; for younger investors, it may mean strategic thinking beyond repaying the mortgage and funding school fees.
The edifice stands
Despite all the changes to how much you can contribute to super and the carnage caused by falling asset prices, the tax-advantaged structure of super remains intact.
Equally important, decisions about which assets to invest in are the same regardless of whether it is inside or outside super and can make a considerable difference over the longer term.
In a nutshell, money invested in the super system carries tax benefits that, if used properly, can leave you with a substantially higher balance.
It is up to individuals and their advisers to be strategic about how they boost their super balance.
It is well worth making a short-term sacrifice now, living on less to have more in super later.
Kathy Evans, has crunched the numbers to show how a working couple in their 50s with relatively low super account balances could boost their fortunes by 40 per cent in 10 years using salary sacrificing. The difference it can make for a couple in their early 40s with three kids and a mortgage is equally compelling.
Reaching the end
“Baby boomers in particular are getting to the end of their paid working lives and making the final run towards retirement with too little super to give them independence from the age pension,” Evans says.
“By structuring things differently and salary-sacrificing they can make a substantial difference to their end balance,” she adds.
Evans says that while many empty-nesters or people nearing retirement will choose to put any disposable income into the bank or spend it on long-overdue holidays, they could make a huge difference to their future lifestyle by battening down the hatches instead.
The real tax benefits of putting money into super start to kick in when income levels exceed $37,000. Instead of paying tax at 32.5 per cent, contributions up to $25,000 attract a 15 per cent tax rate.
The catch is the money can’t be touched until retirement or age 65.
Now or later
Evans says the choice between spending now or later depends on an individual’s situation and their choices but they should be aware of the difference they could make to their super balance.
With the mortgage paid off and the school fees over with, now might be a good time to reassess what happens to disposable income.
Everyone knows it is easy to spend, but what happens if you save in a tax-effective manner?
Take the couple in their 50s. Earning $150,000 and $40,000 a year respectively with an opening super balance of $200,000, they could retire at age 65 with $770,000 after 10 years provided they are prepared to make lifestyle changes and salary sacrifice around $35,000 a year.
Because of the tax advantages, in the first year they would actually only be cutting their disposable income by about $14,650.
By just continuing to pay the super guarantee (it’s 9 per cent but is due to rise to 12 per cent by 2020) the couple would retire with a much lower super balance of approximately $545,000.
“This gives them a part age pension but limited free capital for other purposes in retirement,” Evans says.
Without knowing the exact increments for the proposed increase in the SG levy or its timing, it’s been assumed at 9 per cent a year for this example.
Multiforte Financial Services director and adviser Kate McCallum says discussions with clients about how to make the most of assets for the best chance of a comfortable retirement are often about recognising the cost benefits or trade-offs of putting money into?super.
McCallum says a person used to re-signing at the end of each car lease could instead buy a car for a value around that of the balloon payment, and put the equivalent of interest payments into super.
“If you point out it could mean another overseas trip in retirement, then people start to think differently about what is possible,” McCallum says.
Other ways to generate extra income or free up funds include a partner moving to a bigger role to increase income, working past the planned retirement age, or selling an investment property and putting the proceeds to super.
McCallum says a contractor might consider setting up as a sole trader or company to take greater advantage of the tax deductibility of expenses such as a car lease or home office costs.
“It may also be possible to downsize the family home and either buy something smaller or rent to free up funds to invest in assets that are income producing,” McCallum says.
Prescott Securities adviser Peter Hickey says with government cuts to the amount people can contribute pre-tax to super, those close to retirement should “beg, borrow or steal” the money to invest.
As of July 1, 2012, the concessional or pre-tax contributions cap is $25,000 a year for everyone. (It remains uncertain as to whether the government will reintroduce an earlier plan to allow people aged over 50 with account balances below $500,000 to contribute $50,000 a year at the concessional tax rate.)
Hickey says one super boosting strategy that may work for those a few years off retirement is to take advantage of the low interest rate environment and redraw on a mortgage to put it into super, where there will be considerably more after-tax dollars working for them than elsewhere.
Once they hit retirement, he suggests, the money can be withdrawn tax-free to pay off the mortgage, leaving the rest to compound in a tax-advantaged environment.
It is also worth taking advantage of government incentives such as co-contributions and spouse contributions.
Under the co-contribution rules, individuals earning up to $46,920 who contribute up to $1000 of their post-tax dollars into their super account, the government will pay up to $500.
Where a spouse is earning less than $10,800 it is possible to put $3000 into their super and receive a $540 rebate for doing so.
Source: Australian Financial Review – Smart Investor, written by Bina Brown