The writing’s on the wall — the need to save for a comfortable retirement is more pressing than ever with life expectancies steadily increasing. The Australian Bureau of Statistics (ABS) said a male born now could expect to live to 79.9 years, while a female could expect to live to 84.3 years.
Estimates of how much money will be needed in retirement differ according to whom you ask. ASIC’s MoneySmart says an average single person will need a $544,000 lump sum to live a comfortable lifestyle in retirement, while an average couple will need a $744,000 lump sum. The estimates are applicable for people retiring at age 65 who will live to an average life expectancy of about 85.
Meanwhile, the Association of Superannuation Funds of Australia’s (ASFA) latest Retirement Standard says an average single person who is the recipient of a part Age Pension and has been in a taxed superannuation fund for 30 years will need a $430,000 lump sum. According to ASFA, an average couple in the same position will need $510,000.
Whichever estimate you choose to believe, the bottom line is many people are unprepared for their retirement. According to research conducted by professional services firm Towers Watson and the University of Melbourne, only 22% of middle-aged singles and 53% of couples are on track to meet the ASFA Retirement Standard’s notion of a comfortable retirement. Further, a Suncorp report published earlier this year said more than 1.3 million Australian baby boomers will have to work beyond their 75th birthday due to insufficient retirement funds.
So what are the simplest and fastest ways people can boost their superannuation balances?
Tom Garcia, chief executive at not-for-profit organisation the Australian Institute of Superannuation Trustees (AIST), says an easy way to boost your super can be as straightforward as consolidating multiple super accounts to reduce fees.
“One in two Australians have an inactive or ‘lost’ super account, so it’s always worth checking the ATO’s lost super website www.superseeker.com.au,” Garcia says. “A difference of just half a per cent in annual fees can literally mean the difference of $50,000 at retirement, all other things being equal.”
Even after consolidating all super accounts, Garcia says the fees payable – administration fees, investment fees and insurance fees – is still an important consideration when thinking of how to best build one’s superannuation balance.
He suggests not-for-profit funds – otherwise known as industry funds – as one suitable vehicle to store retirement savings as they return their profits to the members and do not pay commissions to financial advisers.
Larger not-for-profit funds are open for anyone to join, while a select few are restricted to employees in a particular industry. Generally however, they are low to mid-cost accumulation funds – although some have high fees. Refer to this useful guide by MoneySmart on the different types of super funds.
“Not-for-profit funds are also extremely competitive when it comes to offering low-cost insurance, particularly compared to what can be purchased outside the super sector. When looking at fees, don’t forget to review what sort of insurance you are receiving – you may be paying more because of higher insurance cover,” Garcia says.
Insurance costs refer to the group insurance that super funds offer that include the likes of life insurance, total and permanent disability (TPD) insurance and so forth.
Lauren Radcliffe, superannuation consulting manager at Pitcher Partners, echoes Garcia’s thoughts on the importance of checking what death and TPD insurance fees are being paid. “Insurance premium costs, and the level of cover available or provided can vary significantly between funds.”
Garcia also advises people to regularly top up their super funds. This can be done through concessional (before-tax) contributions and non-concessional (after-tax) contributions. These voluntary contributions attract a tax rate of 15%, which for middle to high-income earners is a significantly lower tax than that of their take-home pay.
“If you have money available, voluntary contributions into your super attract a low tax rate, and compounding interest means your money will be worth a lot more when retirement comes around,” Garcia says.
There is also a range of government incentives available designed to help people effectively save for their retirement. According to Garcia, low and middle-income earners may be eligible for the government co-contribution scheme.
“For those with an ‘adjusted’ income of less than $34,488 the government will put 50 cents into your super fund for every one dollar after tax contribution you make (up to $500). You can still get the government co-contribution up until an income of $49,488 but at a decreased rate.”
Meanwhile, low-income earners can capitalise on the low-income superannuation contribution (LISC), although this initiative was recently repealed as part of the repeal of the Mineral Resources Rent Tax. However, the LISC will be payable on contributions up until 1 July, 2017.
“The measure – which is automatically applied and does not require people to make extra contributions – provides a tax refund of up to $500 for individuals earning
under $37,000. This makes sure they don’t pay more tax on their super than their take-home pay.”
Radcliffe recommends high-income earners should maximise their concessional and non-concessional contributions up to the allowable limits. If they have a self-managed superannuation fund (SMSF), there are strategies that can be utilised once the contributions caps have been reached.
“If cash is not available, high-income earners should seek advice on what other assets may be suitable to contribute to their SMSF.”
Depending on your circumstances, Radcliffe says SMSFs can be a more effective retirement savings vehicle than the average APRA-regulated fund.
“SMSFs generally provide greater control and flexibility over investment decisions. An SMSF may also provide more flexibility for putting tax-effective contribution and benefit strategies in place. Additionally, fees in an SMSF may be lower than an APRA-regulated fund if your balance is sufficient to make an SMSF cost-effective,” she says.
Radcliffe also points out how gearing can be used by SMSF trustees to build their superannuation.
“Gearing – via a limited recourse borrowing arrangement – may provide potential for increasing your super benefits. However, care must be taken to ensure all legal and compliance requirements are met.”
SMSFs are best suited to financially savvy individuals who wish to take complete control of their superannuation and require significant administration and management of investment strategies. They are not for everyone.
Although it is easy to feel overwhelmed comparing your superannuation balance with the lump sum you will eventually need to bankroll a comfortable standard of retirement, Garcia says it is important to remember that a majority of Australians will also qualify for the government’s Age Pension payment.
“Get proper financial advice and talk to your super fund to make sure you are in the best position possible for a comfortable retirement.”
This article looks at super in a general way; if you need specific advice regarding your situation, you should consult an appropriately qualified and registered professional.
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Writer: Sonia Nair