Superannuation

If your retirement plans include fine dining and luxury travel then start making those extra contributions to superannuation now. The simple truth is that a regular savings plan is the biggest determinant of the final retirement sum as it allows plain, old-fashioned compound interest to work its magic to greater effect.

Five-year returns in super are less than 5 per cent per annum and, in many cases, only half that amount.

The fact that super funds are meeting their investment objectives does not mean that capital left to sit for the next 20-odd years will produce a sum sufficient for a comfortable retirement.

Cold hard reality

Money lost during the GFC can only be replaced with new contributions, so it’s time to get real and get saving. Figures from Chant West show the average fund fell 27 per cent during the GFC and have returned 31.5 per cent since sharemarkets bottomed at the end of February 2009.

A further 6 per cent return is needed for the average fund to get back to pre-GFC levels.

The good news is that pushing an extra $100,000, or more, into super by retirement is not out of the realm of possibility.

Figures crunched by financial advisory firm ipac show a 40-year-old can salary sacrifice an extra $70 into super each week and, if it earns an average 6 per cent, retire with $100,000 more than otherwise. If it earns an average 8 per cent return, it would take a little less, or $55 per week, to record that extra amount.

A 50-year-old needs to salary sacrifice $125 a week to save the extra $100,000 if a fund is earning an average 6 per cent, or $110 if it is earning 8 per cent.

For people taking time out of the workforce or at their earning’s peak, the numbers are far more sobering.

Employer contributions fall short

Most people will need the extra $100,000, if not more, for a nice retirement. Of course, they can choose to accrue it in investments outside super but if superannuation is their investment of choice then compulsory employer contributions are unlikely to meet their needs.

A 30-year-old with $10,000 in super and annual salary of $60,000 will have $320,000 at age 65 if they make no contributions on top of compulsory payments, according to the Association of Superannuation Funds of Australia (ASFA).

This is insufficient, according to ASFA, to provide a comfortable retirement for a single person, let alone a couple.

Saving the $100,000 or more later in a working life is difficult, as there has been an annual limit on super contributions since July 2007 of $25,000 for people under 50 or $50,000 for those over 50 (the latter is to be halved from next July for people with more than $500,000 in their funds).

Bendigo Wealth’s head of financial planning strategy, Greg Everett, says these limits mean most people must plan to maximise savings during their working lives rather than expect to make a big contribution just before retirement.

“Contributing more than the 9 per cent from your employer as early as possible has to be a factor. As the financial markets have shown us in recent years, you can’t rely on 15 to 20 per cent market returns to get you a comfortable retirement,” Everett says.

Bells and whistles

The good news is that the tax benefits and other concessions of super make it easier to save extra in super rather than ordinarily.

The sums required for the extra $100,000 at retirement, for example, are based on pre-tax contributions that are salary sacrificed, rather than paid from a salary once income tax is deducted.

So a 40-year old who earns $85,000 will actually lose only $43 a week in take-home pay to contribute an extra $70 to super, while saving $16.45 in tax, or $34 to contribute an extra $55 with a tax saving of $12.93.

There are harsh penalties for exceeding annual contributions caps, so stick within the limits.

It’s worth the effort, as while the caps may be a minefield to navigate, a working couple could be contributing up to $25,000 each a year to super, plus up to $150,000 more per year each after tax.

“That’s $350,000 a year,” says Stephen Blackhall of Patersons Securities. “So if you get the right advice and make the caps work for you, you can really boost your retirement savings in the last few years of your working life.”

Safety first

It’s better to make extra contributions than adopt a risky investment strategy in the hope of generating higher returns to boost a nest egg, as that tactic is fraught with risk of significant capital loss.

“We see a lot of people investing their super in very risky assets as they try to make up for lost time. If you lose that money, it is [money you won’t have] in retirement,” says ipac’s Colin Lewis.

After all, not losing money is just as good a result as not making money when it comes to investing.

Life’s financial pressures, such as mortgages and school fees, might well mean extra contributions to super are off the agenda for many people. But other strategies could mean even a little extra can go a long way.

And, remember, the sale of assets such as an investment property or shares, and the receipt of bequests might be another way of putting extra amounts into super. But there are annual limits on such contributions too.

People of any age can make after-tax super contributions of $150,000 or $450,000 averaged over three years but, again, beware penalties for putting too much into super. In this instance, the hit can be as much as 93 per cent of the amount in excess of the cap.