When you’re in your 30s and 40s, retirement can seem a long time away. But recent research suggests that unless you increase your super savings now, there may be a significant gap between the retirement you imagine and the one you can actually afford.
The super savings gap
As a nation, we’re unprepared for the true cost of retirement, partly because we are living longer than ever before. We also have higher expectations of our lifestyle once we retire.
Recent research by Rice Warner Actuaries calculated that in 2011 there was a national super savings shortfall of $836 billion. That’s about $79,000 for every worker between 25 and 64 who earns less than twice the average wage.1
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 $430,000. 2 But if you’re relying on your employer contributions alone to meet this retirement goal, you could be in for a nasty surprise.
According to ASFA, if you’re earning $50,000 a year, your lump sum benefit after 30 years of contributions would be just $183,000 (assuming 9% super guarantee contributions, investment earnings of 7% and current tax rates). While the increase in the super guarantee rate to 12% by 2019 will go some way towards closing this gap, it’s still likely to fall short.2
Five strategies to help close the super 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 showed that 68% of Australians don’t have a target for their retirement savings or income.3
2. Sacrifice some of your salary
Making a regular pre-tax contribution from your salary into your super is a simple way to help boost your retirement funds. Not only will you get the benefit of extra savings, but if you’re earning more than $46,000 year, you’ll also get more from your money, thanks to the low tax rate on super contributions.
Remember, there are limits on how of your pre-tax salary you can put into super. The current concessional cap is $25,000 a year.
3. Contribute to your spouse’s super
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 up to $540 when you contribute more than $3,000 your spouse’s super, provided they earn less than $10,800 in the year.
4. Make a lump sum contribution
For many people who come into a lump sum — a bonus, inheritance or redundancy payout, for instance — their first thought is to put it on the mortgage. But depending on your circumstances, you may be better off putting it into super, or using it to supplement your income and increasing your pre-tax contributions.
The current limit for the non-concessional (after-tax) contributions to your super is $150,000 a year. However, under the bring-forward rule, you can combine three years’ contributions in a single payment, which means you can make a total contribution of $450,000.
5. Consider co-contributions
For people earning less than $46,000 a year, making an after-tax payment to your super can make you eligible for a government co-contribution - effectively boosting the value of your payment.
Get the right advice
The best strategy for you will depend on your personal circumstances, including how much tax you pay. So before you decide how to close your super gap, talk to your financial planner.