Closing the Super 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.
The savings gap
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.
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).
Relying on your employer compulsory super contributions will leave most people short of this comfortable retirement goal. For example 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. The government’s website has some great calculators to help you set your target and assess how you are tracking towards it you can see these at www.moneysmart.gov.au
2. Sacrifice some of your salary
Making regular contributions from your pre-tax salary into your super is a simple way to help boost your retirement funds. The amount you sacrifice into super will generally be taxed at 15%. But this is likely to be less than half of the marginal tax rate you pay on your salary (if your income is over $37,000).
3. Consider co-contributions
For people earning up to $49,488 a year (before tax), making an after-tax payment to your super could make you eligible for a Government co-contribution of up to $500 — effectively boosting the value of your contribution.
4. Contributions from your spouse
When one partner takes time off to care for children or elderly parents, they lose the benefit of regular super contributions, adding to the super gap. To help counter this, the Government offers a tax rebate of up to $540 when you one member of a couple contributes up to $3,000 into their partner’s super, providing the partner receiving the funds earns less than $13,800 in the year.
5. Make a lump sum contribution
Whether it is a bonus, an inheritance or a redundancy payout, a lump sum contribution to super may be a good option. Alternatively you could choose to live off the lump sum to enable you to increase your salary sacrifice contributions.
6. Consider a transition to retirement strategy
If your over age 55, there are some really tax effective strategies that you can use to give your superannuation lump sum an extra boost as you approach retirement.
Get the right advice
The best strategies for you will depend on your personal circumstances, including how much tax you pay and what limits apply to adding to your super. Discussing your particular circumstances with a financial planner will not only uncover the optimal solution for you but can also makes sure that it fits with the practicalities of your day-to-day life.