Key points
- Taking control early and consolidating accounts can help magnify your balance early on.
- Take advantage of government schemes – such as the co-contribution, and salary sacrifice when you can.
- Work out whether you might be better off using extra cash to contribute to super instead of your mortgage.
People constantly ask me how to make sure they’ll have enough in retirement. It’s a tough question, and there are no easy answers. But there are things you can start doing, and make sure you’re on top of, from about the age of 35 onwards.
Of course, it’s hard for the younger generations to even imagine, let alone start planning for, their sixties, but just a few actions now, could make a whole lot of difference later on.
In this, the first of three articles around how to maximise your super, I want to tackle some of the things that Gen Ys and Xs– or people around 35 to 45 years old – should be doing. Following articles will look at baby boomers and pre-retirees.
1. Take control
First of all, you need to take control of your super. You can do this by:
a. Tracking down lost super (by not doing this you’re really throwing your salary away) and consolidating it into one account. Start with the ATO’s Super Seeker.
b. Keep your super fees to an absolute minimum as the more fees you pay, the less you’ll have towards your retirement. ASIC has found that paying an extra 1% each year in fees could cost you up to 20% of your retirement benefit over 30 years. Do your research and make sure you’re not getting ripped off as it’ll cost you dearly in future years.
c. Don’t forget to protect against unfortunate events – check the amount of life and total and permanent disability insurance cover that comes with your superannuation and consider topping this up if it’s not enough.
2. Review your super fund
How is your super fund performing? Comparison websites where you can compare the performance of your fund include www.superratings.com.au and www.chantwest.com.au. Past performance is no indication of future performance but if your fund is consistently underperforming, and you don’t understand why, you can always take your money elsewhere. You may even find you have enough for a self managed superannuation fund. Many industry professionals say you need at least $200,000 to start an SMSF, but it depends on your individual circumstances. We’ll explore this more in future articles.
3. Time is on your side
Remember in your thirties you have time on your side, so learn how to use it! You can assume you’ll be in the accumulation stage for another 25 to 30 years. This makes you a long-term investor and can work in your favour. For example, if you’d invested $100,000 in the share market in March 1982, by March 2014 it would be worth almost $1.2 million, and that’s without investing any dividends. This period includes two severe share market crashes, when on both occasions the market lost more than 50% of its value. Review your investment options. You may be able to afford to take on a bit more risk in more growth style assets.
4. Understand the opportunities
Ultimately, the government wants you to build your superannuation balance so you don’t have to rely on the pension in your retirement, and they offer a range of assistance to help you do this.
a. Government co-contribution – If you earn under $49,488, the government gives you up to $500 in additional super investments if you put in at least $1,000 of your own after-tax money. This really is money for jam.
b. Salary sacrifice – this is where you make additional contributions to super with your pre-tax salary. The preferential tax treatment of super means that you will be able to build your balance faster. If, at age 35 on a salary of $50,000 and a super balance of $50,000, you were able to contribute an extra $70 a month, you would be able to boost your balance at retirement (age 70) by an extra $40,000. But there are caps on how much you can contribute to superannuation each year.
5. Your mortgage or your super?
In certain circumstances it may even be better for you to pay any extra cash into superannuation instead of your mortgage. Fellow Switzer Super Report expert Paul Rickard crunched the numbers in this article recently. He found that if you’re earning $100,000 and paying down a 25-year mortgage of $300,000,on an interest rate of 5%, it would be better to salary sacrifice $820 into super than pay off $500 (the same amount after-tax) on your mortgage. The numbers tell the story below.
Mortgage vs. Super (with salary sacrifice) – $500 per month
Don’t forget that the disadvantages of contributing extra cash into super instead of the mortgage is that you can’t access it before you retire and this strategy works best when interest rates are low.
6. Don’t forget to live
Finally, don’t forget to leave enough to live on. Of course, you should save as much as you can for retirement but before you reach your older years, you’ll need to pay for your life. This might mean feeding, clothing, housing and educating your family. None of this is cheap and you need to put money aside to pay for all these events. A smart budget will help you do this.
With Penny Pryor
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
