Superannuation

The Savings Gap

While as a nation we collectively face a large retirement savings gap, there are a number of smart things you could consider doing to help make sure your future financial security isn’t at risk – through superannuation contributions. Most Australians are financially unprepared for retirement, partly because we are living longer than ever before and we have higher expectations of our retirement lifestyle.

Research conducted by Rice Warner Actuaries reveals that Australia has a shortfall in super of close to $1 trillion.

What’s more, the Association of Superannuation Funds of Australia (ASFA) says the average couple needs at least $510,000 to fund a comfortable retirement, while a single person needs at least $430,000 (both calculations assume receipt of part Age Pension).

If you’re relying on your employer compulsory super contributions alone to meet this retirement goal, you could be in for a surprise. According to ASFA, if you’re earning $50,000 a year, your lump sum benefit after 30 years of employer contributions would be just $183,000 (assuming 9% super guarantee contributions, investment earnings of 7% and current tax rates).

While the gradual increase in the super guarantee rate to 12% by 2025 will go some way towards closing this gap, it’s unlikely to be enough.

Strategies To Help Close The Gap

1. Set your target

The first step in closing the super gap is to understand how much you will need to create the retirement you want. While this may seem obvious, research by Investment Trends shows that 68% of Australians haven’t set a target for their retirement savings or income. A simple way to estimate how much you’ll need to save is by using a superannuation calculator such as the one at www.mlc.com.au/SuperannuationCalculator.

2. Contribute more to super

Seems simple. But there are rules around how much you can contribute and you also need to consider what may be best for you.

(a) Employer Contributions

The minimum legislated rate of contribution made by an employer to your super is 9.5%. There are some employers who put in more than this under certain circumstances. This type is called a “concessional contribution” because it is put in before tax.

(b) Salary Sacrifice – before tax contributions

Making regular contributions from your pre-tax salary into your super is a simple way to help boost your retirement funds. Not only will you set aside savings for your retirement, it can also reduce your tax. Care must be taken, however as both employer and salary sacrifice contributions form part of your “concessional cap” – the maximum you can put into super before tax.

(c) Personal Concessional Contributions

If you are not an employee, then you may be able to make contributions and claim them as a tax deduction.

(d) After Tax Contributions

There are a range of contributions that you can make after tax. These are called “non-concessional” contributions and are subject to an annual cap.

(i) Co-contributions

You may be eligible to claim a Government co-contribution of up to $500 for the contribution that you make to super depending on how much you earn.

(ii) Spouse Contribution

If your spouse is not earning or earning under $13,799, you can build their super by contributing up to $3,000 and gain up to $540 in a tax rebate as a reward.

(iii) Non-concessional Contributions

Whilst you may not be eligible to claim the two concessions listed above, putting money into super where it is taxed at the maximum rate of 15% on earnings is often a good strategy to boost your retirement savings. There are rules on when and how much you can put in but we tailor the strategy to your circumstances.

3. Transition to Retirement

When you get closer to retirement, you could take advantage of a transition to retirement strategy to help boost the funds you put into super before tax. This makes it possible to access some of your super in the form of a pre-retirement pension while you are still working. If you have reached your ‘preservation age’ (which varies, starting at age 55 if you were born before 1 July 1960) and are still working, we can show you how you could salary sacrifice into your super while simultaneously drawing a pre-retirement pension. This tax-effective strategy could help increase your retirement savings.

4. Consolidation of Funds

The concept of a “job for life” is less of a reality than it has been in the past. In fact on average there are 11 job or career changes in the typical Australian working life. There is also a large shift to a greater use of a casual workforce and many freelance workers. This means a trail of superannuation accounts can be created and forgotten, while over time those amounts dwindle through fees and charges. We can help you consolidate your super accounts and bring them all back together into one account and maximise the savings you’ve already put into super.

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