Whether retirement is a long way off or just around the corner, it’s never too late to start considering how you can manage your salary to optimise your retirement nest egg.
With estimated life expectancies predicting healthier, longer and more fulfilling lives, meeting the challenge of ensuring that you have enough to fund a longer retirement is more important than ever. After a few years of market volatility, now is a good time to review the level of fees and commissions you pay, make sure your strategy is the most tax effective available, and perhaps seek advice from a professional financial advisor on whether your money is working as hard as it could be. These days there are a number of simple and effective options that can help you to build your retirement savings. Some of these options are more relevant for particular income levels, so let’s take a look at some specific examples to give you an idea of what to look out for if your circumstances are similar.
Getting the basics right
Annual salary: $37,000
Jessica has just celebrated her fifty-first birthday, is working in the hospitality industry and earns an annual salary of $37,000. With lots of competing budget priorities, Jessica does not have much spare income available to boost her super at this stage.
Super ways to save
1. Review investment option
At this stage of her savings, Jessica should consider seeking expert advice on choosing her investment option. Selecting the right investment option is particularly important now to ensure her super continues to grow, but also takes into account how long she expects to continue working so that she can protect the savings she has already accumulated.
2. Track down lost super
Because Jessica has had a number of different employers over the last few years, she has bits and pieces of super sitting around in various accounts that she has forgotten about. In fact, this can happen to anyone who has changed employer or their name and address. The Australian Taxation Office (ATO) can search for your lost super; simply visit its website with your tax file number on hand (see MORE).
3. Take the free money
Because Jessica earns less than $61,920, the Federal Government’s co-contribution scheme is an easy way to help her increase her super savings. Based on a sliding scale, the Government will add superannuation contributions to any she makes herself. At the best end of the scale – if you’re earning less than $31,920 – the Treasurer will give you $1 for every dollar you contribute, up to a maximum of $1000 per year. The co-contribution reduces as your income increases, cutting out at an income of $61,920 – but up to that amount it’s simply free money!
Boosting your super
Annual salary: $62,000
Philip works in an administrative position in the construction industry, is almost 50 and earns $62,000 per annum. At this stage in life, Phil is still juggling a lot of expenses such as a fairly high mortgage and educating his teenage children. He is well aware that it’s an important time to boost his savings, but there is not always a lot of money left over to contribute extra to super or investing.
Super ways to save
1. Consolidate and save
Phil has changed employer a number of times over his working life and this has resulted in him having a number of different super funds with various balances. At this stage, it’s not a bad idea to think about consolidating separate balances into a single fund with positive features and benefits. This means Phil can probably save on fees and commissions, cut down on the paperwork and get a clearer idea of where his super is heading.
2. Salary sacrifice
At Phil’s income level, salary sacrifice is often a good way to minimise tax and effectively boost his super, without taking out too much from his pay packet. Phil could arrange to set up salary sacrifice with his employer so that a nominated sum is diverted from his pay into his super before tax is taken out. This reduces Phil’s taxable income, so that he may pay less tax – and his super contribution is taxed at only 15 per cent (this concessional contribution amount is limited to $25,000 per annum for anyone under age 50 and $50,000 once you are over 50).
3. Protect your income
As the main income earner of the family, things would get very challenging financially if Phil was to become ill or
injured and had to take time off work. It could be a good idea to take out income protection insurance through superannuation. This way deductions come straight out of his super balance, so Phil won’t be out of pocket. It also means that he will still have money coming in to pay the bills if he can’t work.
Supercharging your savings
Annual salary: $110,000
At 58, and on an annual salary of $110,000, Carl is starting to think about planning for retirement, but is unsure of
exactly how much he’ll need, and when he’d like to take the plunge. At this stage, he’s not sure if he’ll have anywhere near enough saved to ensure a standard of living similar to the one he’s enjoyed in recent years. In fact, Carl’s not sure that he’s in any rush to retire at all, although he would certainly like to look forward to having more time for pursuing his interests away from the office.
Super ways to save
1. Invest in advice
Carl’s first step should be to decide how much he should now be contributing to super to achieve the type of retirement lifestyle he would like. There is no magic formula or figure for working this out, but in general terms, if you aim for around 60 per cent of your current annual income, you’re on the right track. Benjamin Franklin said that “an investment in knowledge always pays the best interest” and this is absolutely true when it comes to super.
A financial advisor could help Carl work out how much he needs to be saving to achieve his retirement goals.
2. Use a transition strategy to boost super
Because he is over 55, Carl is eligible to tap into a great pre-retirement strategy known as transition to retirement. This option would mean that Carl would salary sacrifice part of his income into super and pay 15 per cent rather than his significantly higher marginal tax rate. He can then supplement his income by drawing money from his super, through a super pension account. The advantage is that he can maintain the level of income he’s used to while his retirement savings build up faster. Carl will need to be aware of limits the Government imposes on
concessional contributions, which means if you are over 50, you are able to contribute up to $50,000 per
annum to your super at this reduced rate.
3. When the time is right, ease into retirement
If Carl is thinking about test-driving retirement by reducing his hours, transition to retirement will also enable him to do this. With agreement from his employer, he can elect to cut back on his working hours, but overall still take home the same income. He can supplement his salary by withdrawing a regular income from a super pension that he can start from his existing savings. This is a good option if Carl wants to have a better work/life balance to allow time for doing the things he enjoys, without losing his links to his working life.
Disclaimer: This article is general in nature and does not take into consideration your individual circumstances. Readers should seek further advice before making financial decisions. Personal financial advice is provided by Quadrant First Pty Ltd | AFSL no. 284443. Quadrant Superannuation Pty Ltd | ACN 067 516 938 | AFSL no. 290812 | RSE no. L0000215. Quadrant Superannuation Scheme | ABN 12 727 521 796 | Scheme Registration no. R1000269.
Wayne Davy is Chief Executive Officer and a representative of Quadrant. Visit the Quadrant Super & Retirement website for further information on these super savings options.
Ph 1800 222 209
Other useful websites
Australian Taxation Office
The Australian Securities & Investments Commission’s Moneysmart and Understanding Money websites
To find lost super contact the ATO.
Ph 13 28 65 (SuperSeeker self-help line)