For most Australians, superannuation represents their largest single investment after buying their own home. The more you know about your superannuation and the more control you have over it, the greater your chance of living your retirement income goals. Here are some of our simple tips to boost your superannuation and build wealth in preparation for retirement.
Taking more interest in your superannuation is important given that 9.5% of your salary (increasing to 12%pa over time) is contributed into your superannuation via compulsory employer superannuation guarantee (SGC) payments each year.
Understanding how superannuation works will help you to make better decisions on how best to manage, invest and contribute to your superannuation in order to maximise wealth in preparation for your retirement. Superannuation is taxed at a concessional rate to reward you for locking away your savings and to encourage you to save more for the future. There can be advantages to the way your superannuation contributions are taxed and the income earned in the superannuation fund can also be favourably treated for tax purposes. There are some significant tax advantages too when it comes time to take money out of the fund.
Setting a goal and having a planned retirement date provides both clarity and something to work towards. Irrespective of whether retirement is in the distant or not too distant future, once we have a target not only are we more likely to commit to it, but it becomes more tangible and you’re likely to take more of an interest in your retirement nest egg. It is a good idea to work with your financial adviser to articulate this goal and plan accordingly.
It’s okay if you change your mind about your retirement date. A target doesn’t have to be static to make it more realistic. It’s more important that there is a goal in the first place. As the saying goes “It’s better to start with the end in mind”.
When it comes to your superannuation there are three key factors that will impact your final balance.
The first factor is how your superannuation is invested. Typically it will be invested in accordance with your risk profile which determines the amount of income producing assets (cash and fixed interest) and growth assets (shares and property) to invest in within the portfolio. The higher the allocation to income assets, typically the more defensive or conservative the portfolio. The higher the allocation to growth assets, typically the more risk required to generate the return. Understanding which mix is right for you will depend on your attitudes to risk and return, investment time frame and objectives.
The second is the long-term investment earnings (after taxes and fees), also referred to as the performance of your superannuation fund. Your superannuation balance will be accumulating and compounding over a long time frame and it’s important that you keep track over how it is performing over time. Whilst you shouldn’t be watching the balance daily, it is important that you and your financial adviser review the performance of the fund on a regular basis.
Fees and taxes are important. Every superannuation fund deducts administration fees for running the fund and investment fees for investing the assets of the fund. Along with the investment performance the level of these fees can affect the size of your final retirement benefit sometimes significantly. Let’s look at two super funds – one with total fees of 1%pa and the other with total fees of 2%pa. Both super funds have the same starting balance, contributions, investment performance, insurance charges and taxes, over a 30 year period the superannuation fund that charges 2% pa in fees will have a final retirement benefit of 20% less than the fund with a 1%pa fee.
It can sometimes be difficult to determine the fees between different superannuation funds due to the different types of fees, names and services provided. If you’re unsure, it pays to ask or do thorough research to make sure you are comparing funds accurately. Importantly fees are not the only factor to review, in many cases you pay a higher fee for more features or options.
The third factor is how much and how regularly you contribute. If you’re employed then your employer is obligated to invest 9.5% of your salary into your superannuation each year. This required contribution amount will slowly be increasing to 12% pa over time, but in reality even this amount isn’t likely to be enough for most retirees. Many people will need to put some extra money into superannuation in order to top up the balance and afford a more comfortable retirement. There are many ways you can contribute to superannuation and even a little amount contributed often will help to boost your retirement capital over time. If you have little surplus income left over at the end of the week or month it may be worthwhile speaking to your financial adviser about whether contributing more to your superannuation is an appropriate strategy for you.
If you’ve changed jobs or regularly moved house, you may have multiple superannuation or even lost superannuation accounts. Our checklist outlines the process for finding your lost super.
If you have multiple superannuation accounts then you can often benefit from putting all your superannuation into a single account. This will help to save costs by paying only one set of fees, reduce paperwork and make it easier for you to keep track of all your money. Before consolidating superannuation it pays to check whether termination fees apply and whether any insurance cover or other benefits will be lost. You should seek professional advice.
It’s not often the Australian Taxation Office gives away money, but if you’re eligible you could receive up to $500 per year in additional contributions. This tax-free giveaway, called the Co-Contribution Scheme is payable to anyone who earns less than $49,488pa and makes a non-concessional (after tax) contribution to their superannuation fund. There are some conditions that do apply, and the amount of co-contribution you are entitled to will depend on how much you contribute and how much income you earn that year. Your financial adviser is the best person to discuss this with and to check your eligibility.
Whether married or de-facto, you are able to boost a non-working or low-income-earning spouse’s superannuation balance by making a non-concessional (after tax) contribution to their superannuation on their behalf. Conditions do apply but if eligible, you may be able to claim an 18% tax offset on the spouse superannuation contributions of up to $3,000 you make on behalf of your non-working or low-income-earning spouse. The maximum tax offset of up to $540 each financial year is payable for spouses with an approximate income of less than $13,800pa.