Today we are living longer, which means we can look forward to many years of retirement.
The age when you retire will determine how much money you need to sustain your expected lifestyle.
If you're a baby boomer, you probably only started accumulating super when 3 per cent compulsory employer contributions were introduced in 1992. Although the level was increased to 9 per cent in 2002, our research shows that even 40 years of the compulsory superannuation guarantee (SG) will not fund the same lifestyle in retirement that people enjoy during their working lives.
For those who have started super savings late, the reduction in living standards in retirement may be dramatic. The most vulnerable include women, renters and those forced into early retirement.
But it's not too late to maximise super in your remaining working life. Making voluntary contributions even late in your career can significantly improve your retirement income.
The new super rules introduced in July 2007 provide greater flexibility for those aged 55 plus and nearing retirement. And the new pension asset test rules mean that you can still qualify for a part-pension with substantial super savings.
Maybe it's time to engage a bit more actively with your super and learn to appreciate its many good qualities. A little more love can go a long way in this investment class, and you might find that it offers you a whole lot more than other options (like tree-changing or reverse mortgages).
There are a few simple things you can do now to make sure you have enough super to meet your needs when you retire.
Three keys to a super relationship
1. Learn
How much money do you have in super now? Your fund will send you an annual statement telling you how much super you have. Your statement will also tell you the investment options your money is in, and any fees and taxes that have been deducted.
How much should you have? It all comes down to your personal circumstances how you live now and how you want to live later in life. The first step to working out how much super you need is to decide when you want to retire and the kind of lifestyle you want in retirement. The earlier you retire the more money you will need to maintain your lifestyle.
There are a number of calculators online which can help you to plan by giving you a projection of what your super will be at retirement age based on your current super and salary.
Check out the Fido website or your super fund may have a calculator on their website.
Get to know as much about super as you can. Check out your fund's website, and read the annual report and newsletters to get to know your fund better.
2. Love
How many super funds did you say you have? It makes sense to have your entire super in one place. You'll reduce the amount of fees you're paying, only receive one lot of paperwork and you only have to keep track of one fund.
Look to consolidate the super funds you have into one fund. Compare your funds to work out which best suits your needs. Important things to look at are fees and charges and investment options. You can look at past investment performance as well, but it is no guarantee of how the fund will perform in the future.
Once you've chosen the fund you want to keep, contact them and they can help transfer the money from your other super funds.
It's also worth reviewing life insurance cover. There can be real benefits in purchasing life insurance through your superannuation as all super funds offer some form of cover. Provided you have accounted for estate planning needs, insurance through your fund may include life insurance, total and permanent disability (TPD) insurance and income protection which can be paid for from your contributions, potentially saving you hundreds of dollars each year.
A financial planner can help you evaluate whether buying insurance via superannuation will meet your needs.
3. Make it last!
To make sure you have enough for when you retire, consider maximising your superannuation now by tipping in as much as you can manage on top of what your employer is required to contribute up to the available contribution limits. Depending on your personal circumstances and how much you earn, you can contribute from your after-tax income or salary sacrifice from your before-tax income.
You can make after-tax contributions from your take-home pay directly to your super fund at any time or have your employer deduct them from your pay and pass them on to your fund. You can contribute up to $150,000 each financial year or up to $450,000 averaged over three years. Depending on your income, these contributions may qualify for the Government co-contribution.
If you earn less than $28,980, the Government will contribute $1.50 for every dollar you put into super up to a maximum of $1,500. Just $20 a week will give you the maximum co-contribution. If you were to contribute an extra 3 per cent of your income into super you could improve your living standard in retirement by 17 to 25 per cent if you're a man or 20 to 28 per cent if you're a woman.
The other option, particularly if you're a higher income earner, is to salary sacrifice' contributions from your before-tax income. Salary sacrifice contributions are taxable' contributions, like the SG, and are limited to $100,000 each financial year ($50,000 after 30 June 2012). Having your employer take contributions out of your pay before they deduct the tax means you'll have more going into your super and you'll reduce your income tax.
Salary sacrifice contributions are taxed at 15 per cent when they go into your super fund but this can be considerably less than the income tax you would have paid if you took the money home each pay. By salary sacrificing 3 per cent of your income into super, you could improve your standard of living in retirement by 11 to 22 per cent.
If you are considering retiring before age 65 you may want to consider a transition to retirement' pension. From age 55 onwards you can access your superannuation, without having to first retire, in the form of a non-commutable (ie you can't take it as a lump sum) income stream. You could either ease' into retirement by reducing your working hours or responsibilities and top up your income with income from your super or you could actually increase your retirement savings by replacing salary sacrificed income with income from your super.
By making salary sacrifice contributions up to your contribution limit and replacing the net income with income from your super you can actually increase your standard of living in retirement by up to 6 per cent.
Now you've got money in super you can usually choose how it's invested. Most funds will have a default option that the fund trustee has chosen to suit most fund members. Super is a long term investment but the closer you are to retirement, the more concerned you may be about risk. You may be considering more conservative options but remember your super may have to stretch through twenty or thirty years of retirement so don't discount the more growth oriented investments just yet.
If you're not sure which is the best way to contribute to super or how much, or which investment option is right for you to help maximise your super, it pays to get professional advice from a licensed financial planner.
It's complicated. Where do I go for help?
Your fund may be able to provide you with access to a financial planner or you can find one using CPA Australia's find-a-planner service on our website.
