According to the latest ASFA Retirement Standard, Australian singles will need $545,000 and couples around $640,000 to retire comfortably. For many people, the gap between what they have now and what they will need to retire can seem insurmountable, especially in the face of stagnant wage growth and ever-increasing house prices.
Although it can be tempting to take a wait-and-see approach and delay making any big retirement plans, it’s always a good time to review your super strategy. Consider these five tips for growing your super balance effectively.
Make voluntary super contributions
If you want a comfortable retirement, your employer’s compulsory 9.5% contribution may not be enough to build the nest egg you need. Making extra voluntary contributions is one of the simplest ways to boost the amount of super you’ll have available when you can no longer work.
Making voluntary contributions means depositing some of your personal money into your super fund on top of the amount contributed by your employer, after income tax has already been paid or calculated. If your annual salary is less than $51,021 before tax, you are eligible for a government co-contribution of 50 cents for every $1 you pay in voluntary contributions. This co-contribution benefit goes up to a maximum of $500 per year for people who earn under $36,021.
Note: from 1 July 2017, you are only eligible for a co-contribution if your total super balance is less than $1.6 million at the end of the previous year. You also must not have exceeded your voluntary contributions cap.
Salary sacrifice into your super
The other way to increase your super contributions is salary sacrificing. You can ask your employer to sacrifice some of your before-tax salary or wages directly into your super account as an additional super contribution. Unlike voluntary contributions, these payments don’t get counted as assessable income for tax purposes, and are therefore not subject to pay as you go (PAYG) withholding tax. Instead, they are taxed at the super tax rate of 15%.
This option is most effective for people who earn more than $37,000, because the marginal tax rate increases to 32.5% or more (that is, 32.5 cents or more for every dollar earned) above this amount.
Note: from 1 July 2017, the concessional 15% tax rate will only apply to the first $25,000 of the pre-tax super contributions you make each financial year, regardless of your age or income.
Taking advantage of tax concessions can make investing with your super more beneficial than other strategies.
Review your existing super funds
People who have worked for multiple employers often end up with their money spread across a range of super funds. Consolidating your super into a single fund can save you significant costs, because it means you only pay one set of fees. You can usually do this by letting your chosen fund and your current employer know about your decision in writing.
When choosing which fund to roll all of your super into, make sure your employer can contribute to the fund, and that it can offer the levels of insurance you need. You should also check and compare:
- fees – these should not be excessive, and should be directed towards services that benefit fund members;
- performance – find a fund that has performed well over the last five to seven years, not just a recent high performer; and
- investment options – the fund should offer investment options that suit your needs and comfort with risk.
Information on fees, investment options, benefits and performance should be available in the fund’s product disclosure statement (PDS) or by contacting their customer support.
Consider setting up a transition to retirement income stream
Once you reach preservation age, which ranges from 55 to 60 depending on the year you were born, you’re eligible to set up a transition to retirement income stream (TRIS). This is where you start taking an income stream from your fund while you’re still working. People often choose this when they want to transition from full-time to part-time work while still maintaining a comfortable lifestyle.
Income you receive from a TRIS is taxed favourably in comparison to other earned income. If you are aged 55 to 59, the taxable portion of TRIS is subject to your marginal tax rate, but eligible for a 15% tax offset.
If you are aged 60 or over, a TRIS is tax-free (until 1 July 2017). You may also have the option of working full-time with a salary sacrifice arrangement while drawing from a TRIS, which allows you to enjoy the tax advantages of both super-boosting options.
Note: from 1 July 2017, TRIS asset earnings will no longer be tax-exempt, and a 15% rate will apply from this date no matter when the TRIS commenced.
A TRIS may reduce the total amount of super you have available at retirement, even when you factor in the associated tax benefits, so be sure to talk it over with us if you’re considering setting one up.
Consolidate your assets and adjust your risk exposure
Once the kids have left home and you’re ready to start winding down your career, moving to a smaller property isn’t just a lifestyle choice – it can also be an opportunity to shift a big chunk of your wealth into super.
If you choose to transfer money into super as a lump sum, keep in mind that you may be liable for extra tax if you exceed your annual voluntary contribution cap. You also need to factor in additional expenses involved with selling and buying property, such as stamp duty and agent’s fees.
If you’re looking to increase your super later in your career, you always have the option of shifting to a higher-risk investment portfolio. This can deliver better short-term returns, but it’s always a good idea to talk to us about it first – making a bad high-risk investment could cost your nest egg.
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These tips can help you achieve peace of mind, knowing there will be more super waiting for you at retirement time. If you’re not sure what’s right for you, it’s always a good idea to seek financial advice. Contact us today to discuss your super and retirement arrangements.