Regardless of your age it can be daunting to think of how much we need to retire. The Westpac/Association of Superannuation Funds of Australia (ASFA) Retirement Living Standard benchmark recently calculated that the typical Aussie couple currently need around $55,000 per year to live a comfortable lifestyle. If your annual super statement shows you have only enough assets for one or two years of comfortable retirement living, now may be a good time to think about what you want retirement to look like, and how you will fund it.
Superannuation is one of a number of tools in the box that can be used to build a bigger retirement nestegg. It’s a pretty handy tool to have in the box too, because the tax benefits that superannuation can offer are very attractive. Marginal tax rates can be as high as 46.5 cents in the dollar, but tax for superannuation is a mere 15 percent on contributions you claim as a tax deduction (through salary sacrifice or if self employed), and the same for all investment income. Clearly, using superannuation to lower taxes by up to 31.5% can make a big difference to your retirement savings.
The government incentives don’t stop at the lower tax rates. Subject to certain income limits, the government will make a co-contribution of up to $1,000 each year, where the person has made a $1,000 contribution of their own in the same year. If you are on the tools full time, you may earn too much to benefit. But if your partner qualifies, a $1,000 bonus from the government is a nice contribution to your future comfortable retirement*.
Many people think that super is a black box that they have no control over. Wrong! Depending on the super fund you use, you can have complete control over how and where your super fund monies are invested. This provides great flexibility and gives you the ability to decide where the funds are best invested for your personal circumstances. For example, if you invest in property in your own name, you may want to invest in shares in your super.
So where should you start to make the most of your superannuation? I think the starting point is to put some time into working out your strategy. Questions to answer include: Do I need to consolidate a number of super fund accounts? What fund can I use so that I have some control over my super? How should I invest my super? What do I need to do to take advantage of the lower tax rates and government incentives? How can my partner do the same? How does super work in with any other asset accumulation tools I am using such as debt repayment, cash savings or investment property?
If need be, spend some time learning enough to understand and be confident answering the above questions. If you don’t want to spend your time doing that, or with that time you could earn more than it would cost to pay a Certified Financial PlannerTM to do it for you, find one that you can trust to helpyou answer the above questions.
One final point… getting the answers to the above questions is not a job for next month, or next year. Albert Einstein once referred to the affect of compounding investment returns as “the greatest mathematical discovery of all time