With all the financial pressures of a growing family, it’s easy to think that super is something you can leave for later. But there are good reasons to pay attention to your superannuation savings now, helping to protect your financial security for the years ahead.
We all know raising a family is expensive, especially if you’re getting by on a single income. When your family is young, you’re likely to be dealing with a hefty mortgage and a whole host of other costs, from school fees to music lessons.
With all of these financial pressures, it’s easy to think that super is something you can leave for later. But there are good reasons for investing a little time – and perhaps even a little money – in super while your family is still young.
Three reasons to think about super
1) Avoid the superannuation savings gap. If you or your partner work part time or have stopped work to care for your young children, then you’re no longer receiving the same level of superannuation guarantee payments as before. This means you risk creating a super savings gap that could be hard to close in the future if you don’t act now.
2) Don’t rely on super guarantee. Even without a savings gap, employer superannuation guarantee contributions are unlikely to be enough to maintain the lifestyle you are looking forward to in retirement.According to the 1 Association of Superannuation Funds of Australia (ASFA), a couple needs at least $510,000 in super savings, to fund a comfortable retirement, and that assumes that you’ll also be receiving a partial age pension. Even on an income of $100,000 a year, your super guarantee contributions alone are unlikely to provide the funds you need.
3) Put time on your side. One of super’s biggest benefits is that it’s a long-term investment, giving you time to earn returns on your returns. So even a small boost now could make a big difference over time.For example, a 35-year-old man who starts putting $200 a month of pre-tax salary into super today could potentially boost his super savings by more than $114,000 by the time he turns 65. That could be enough to boost your retirement income by around $9,000 a year. 2
Five steps to take control of your super
By now you’re likely to have already worked in several different jobs, so you may be one of the millions of Australians with more than one super account. 3 By consolidating your super in a single fund you can save on fees and make sure all your savings are working towards the right super strategy. Find out more in Easy ways to strengthen your super.
2) Set a target
To save effectively, you need to set a superannuation savings target. Use our How much super is enough? calculator to estimate how much you need to save each month to achieve a comfortable retirement lifestyle for you and your partner.
3) Think about salary sacrifice
It’s likely you’ll need to save more than just your superannuation guarantee contributions to reach your target. Consider asking your employer if you can use salary sacrifice to pay part of your pre-tax income directly into super.
The big benefit of salary sacrifice is that your super contributions are generally only taxed at 15%*. That can make salary sacrificing into super much more effective than an after-tax investment.
For example, if you’re on the top marginal tax rate of 46.5% (with Medicare Levy)*, salary sacrifice could give you a 31.5% tax break upfront.
*From 1 July 2012, the government intends to double the tax rate on contributions from 15% to 30% for people earning over $300,000 a year.
4) Consider spouse contributions
If your partner has stopped work or works part time to care for the kids, you can help boost their super by making a spouse contribution. If they earn less than $10,800 a year, you may qualify for a tax rebate of up to $540 when you contribute $3,000 or more.
5) Stay on track
Super is for the long term, but that doesn’t mean it’s something you can set up once, then forget about until retirement. It’s important to review your strategy regularly and make sure you’re on track – especially when you’re making an important financial decision like buying a larger house or having another child.
If in doubt, talk to a financial adviser. It’s your money, after all.
1 ASFA Retirement Standard, May 2012. Calculations are based on receipt of the age pension as well as own retirement savings.
2 Based on a 35-year old male earning $68,666 a year, with $50,000 in super, receiving 9% super guarantee contributions for 30 years until retiring at age 65, with an investment return of 7% pa after fees and tax of 15%, inflation of 3% pa and salary increases equal to inflation. This example is for illustrative purposes only and returns are not guaranteed in any way. For more information and further important assumptions about how this example has been calculated, please visit our How much super is enough calculator.
3 ASFA, Multiple accounts and superannuation, 2011.
The information contained in this document is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 has of the relevant Australian laws as at 21 May 2012. This is not advice and is intended to provide general information only. It does not take into account your individual needs, objectives or personal circumstances. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. Product Disclosure Statements (PDS) for products offered by Colonial First State are available from colonialfirststate.com.au or by contacting us on 13 13 36. You should read the relevant PDS and consider whether the product is right for you. Past performance and awards are no indication of future performance.
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Orignally posted 20th June 2012 on Wealth Generation Investor Resource Centre