With yet more research showing that baby boomers are unlikely to have enough in superannuation to provide for a comfortable retirement, it is imperative that people start contributing more to super, earlier.
Most people don’t start thinking about retirement until they are into their 50s, but for many this won’t leave enough time to build superannuation wealth, particularly if they rely on the superannuation guarantee contributions alone.
At HLB Mann Judd, we estimate that a comfortable retirement is based on an income of around $55,000 per annum, which means retirement savings of between $800,000 and $1,100,000 (depending on whether people are happy to run down their capital or not).
Achieving this kind of superannuation balance, particularly now that the contribution caps are so low, requires a super strategy be developed as early as possible – in fact, well before age 50.
Even those approaching 40 should be beginning to think more carefully about their super savings. They have the opportunity to start building a sizeable superannuation balance, in conjunction with paying off their mortgage and building personal wealth, that will mean they are well-placed to achieve the kind of retirement they want.
Those already in their 40s may need to start taking serious steps to build up their super.
Take the example of Joe. He is 45 and earns income of $100,000. He has the average household superannuation balance for his age group, of $120,000. Joe doesn’t make any extra contributions to super – he relies solely on the super guarantee contributions.
By the time Joe turns 65, he will have just over $662,000 in his superannuation, allowing an income of between $33,000 and $46,000 a year – not enough for a ‘comfortable’ retirement.
As this example shows, those aged 45 and over can’t rely on the super guarantee contributions to achieve a comfortable retirement, even when the rate increases from 9 percent to 12 percent by 2020.
And the closer people are to retirement age, the less likely they are to achieve a ‘comfortable’ retirement if they haven’t taken steps to build up their super.
Maria, for example, is 55 years old. Her superannuation balance is $300,000, which is above average for her age group. She also earns an income of $100,000. Nonetheless, Maria will have just $610,000 in savings when she reaches age 65, well short of the $800,000 to $1,100,000 needed for a ‘comfortable’ retirement.
The only alternatives for Joe and Maria, that are within their control, are to either keep working until they are in their 70s, or start contributing more to super now. Otherwise they will need to reduce their lifestyle expectations in retirement.
Strategies that worked for pre-retirees in the past, such as making a big push into super in the last years of their working lives, are no longer possible within super and are unlikely to be as effective outside super.
While the rules for superannuation do change quite often, it’s definitely not a good idea to hope for more favourable rule changes in order to ensure a comfortable retirement.
The only safe solution for maximising super is to start planning earlier.
1. Estimated super balance if relying solely on superannuation guarantee contributions:
|
Starting household super balance |
Estimated Super balance at age 65 if currently aged: |
|
40 years |
45 years |
50 years |
55 years |
|
$50,000 |
$696, 271 |
$494,439 |
$337,223 |
$215,607 |
|
$100,000 |
$843,823 |
$614,270 |
$434,539 |
$294,640 |
|
$150,000 |
$991,376 |
$734,100 |
$531,846 |
$373,673 |
|
$200,000 |
$1,138,929 |
$853,931 |
$629,172 |
$452,706 |
|
$300,000 |
$1,434,035 |
$1,093,592 |
$823,806 |
$610,771 |
Assumptions:
Annual household income of $100,000
Annual income grows at two percent per annum
Super Guarantee Rate increases from nine percent to 12 percent by 2020
Annual tax rate is 15 percent
Assumed real rate of return is five percent per annum
2. Estimated super balance if maximum concessional contributions are made:
|
Starting household super balance |
Estimated Super balance at age 65 if currently aged: |
|
40 years |
45 years |
50 years |
55 years |
|
$50,000 |
$1,552,214 |
$1,065,652 |
$692,892 |
$416,483 |
|
$100,000 |
$1,699,767 |
$1,185,482 |
$790,208 |
$495,515 |
|
$150,000 |
$1,847,320 |
$1,305,313 |
$887,525 |
$574,548 |
|
$200,000 |
$1,994,873 |
$1,425,143 |
$984,842 |
$653,581 |
|
$300,000 |
$2,289,978 |
$1,664,804 |
$1,179,475 |
$811,696 |
Assumptions:
Annual household income of $100,000
Annual income grows at two percent per annum
Maximum concessional super contributions commence at $25,000 pa and increase by $5,000 every four years
Annual tax rate is 15 percent
Assumed real rate of return is five percent per annum