How to achieve your dream retirement

By putting extra into super now you will be able to enjoy that dream lifestyle in retirement

You can’t just hope for the best when it comes to having enough money for retirement. Yet plenty of people do. Sixtyeight per cent of us don’t contribute anything extra to superannuation and 18% count on an inheritance to fund their retirement, according to this year’s RaboDirect Financial Health Barometer survey.

A head-in-the-sand syndrome about funding retirement is rife across every generation. Gen Y (21 to 36 years) demonstrates the most positive savings behaviour, with 40% making voluntary contributions to super, followed by 31% of baby boomers (52 to 70) and 25% of Gen X (37 to 51), according to the survey.

But still around 44% of Australians say they don’t think they have enough money in super to fund their retirement while 55% of baby boomers believe that they will run out of money in retirement.

A common lament of retirees is “I wish I had salary sacrificed more to super”. For a whole lot of reasons, the super guarantee rate of 9.5% isn’t enough to fund a comfortable retirement. But there are plenty of reasons why people don’t want to make contributions into super: financial pressures from record high housing prices, stagnant wages and rising living costs. Often people think they will wait until the mortgage is paid off and the children are through school before they start salary sacrificing. This is common among the self-employed and women. But they often don’t catch up.

Jenny Brown, founder of JBS Financial Strategists, says young people want the cash now to fund lifestyle, family and mortgages. “It is understandable,” she says. “But I encourage people to make sure they’re salary sacrificing early on, and that they have adequate insurance. Making contributions to superannuation is essential. A lot of small business owners say, ‘My business is my super’. But that’s not necessarily going to work out if your business relies on goodwill.”

If you put more money into superannuation, you will have more income in retirement. So you need to look at ways to boost your savings. START SMALL AND START EARLY If you don’t have much extra money, give up some regular expenses and put the savings into your fund. If you are young and have time on your side, then topping up your super with small amounts can turn into huge rewards for your future. Think of it as “paying yourself forward”.

For example, if you cooked an extra meal at home each week, you could save $1000 a

If you start contributing extra when you are 28, you pay a third of what you would have to pay when you are 45

year and over 45 years you would have over $175,000 extra for your retirement.

Super funds offer apps that allow fund members to make flexible contributions.

The earlier you start putting extra money aside through salary sacrificing, the more you will have in super because the power of compounding means that the more often your interest is earning interest the more money you make. If you start contributing when you are 28, you pay a third of what you would have to pay when you are 45.

UNDERSTAND THE TAX BENEFITS

Super is the most tax-effective way to save for retirement, with a 15% rate on contributions. Investment earnings are taxed at 15% and there is no tax on pension income if you are aged over 60.

SALARY SACRIFICE

The most tax-effective way to boost your savings is through salary sacrifice, because you are putting your pre-tax salary into your

super fund. The money going into super is taxed at only 15%. You even may be able to slip into a lower tax bracket.

Here is an example of how it works. Johnny earns $90,000 a year before tax, excluding his employer’s super contribution. If Johnny decides to redirect $10,000 of his pay into salary sacrifice contributions, he will save more than $2000 in tax, with the extra money going into his super fund.

But the trade-off for salary sacrificing is that you are locking your money away until retirement and cannot access it until you have reached your preservation age.

An automatic payment plan is the best way to save because the money is taken from your pay before you even see it. Ask your employer or the human resources department to make the deductions. It is best to include the details in your terms of employment and get the agreement in writing. This ensures your employer calculates its 9.5% super guarantee contribution on your original income and not on your reduced salary. Contributions are capped at $25,000 a year.

To work out how much to put aside, look at how much you want to retire on. What are your expectations? There are plenty of calculators (moneysmart.gov.au from ASIC or superguru. com.au from ASFA) that will give you different levels of income in retirement. Calculators ask you how much you have already saved, your salary and when you want to retire.

GOVERNMENT CONTRIBUTIONS

The government co-contribution scheme rewards you for making personal non-concessional (after-tax) contributions. If you earn less than $51,813 a year (before tax) and make non-concessional super contributions, you may be eligible for this matching contribution from the government.

If you earn less than $36,813 the maximum co-contribution is $500 based on 50¢ from the government for every $1 you put in. It doesn’t matter whether you make small regular contributions or irregular lump sums; the co-contribution is based on the total amount of non-concessional contributions you make over a financial year.

The amount the government puts in reduces the more you earn. However, you can earn up to $51,813 and still be eligible for something.

You could also qualify for the low income superannuation tax offset (LISTO). Around 3.1 million people (63% are women) receive the LISTO, which has replaced the low income superannuation contribution. The LISTO provides a refund of contributions tax for anyone earning up to $37,000, up to a maximum of $500.

Low-income earners will typically receive around $260 on average, says Martin Fahy, CEO of the Association of Superannuation Funds of Australia (ASFA). Around 15% of LISTO recipients are aged 30 to 39.

You can find the relevant information at ato.gov.au.

PERSONAL CONTRIBUTIONS

If you have made a personal contribution to your super fund, you can claim a tax deduction. It is available for anyone between 18 and 75 years of age who makes a personal contribution, which is a big help because the average super balance of recipients is less than $50,000.

Fahy says about 850,000 people would benefit from the ability to claim a tax deduction, which is capped at $25,000 a year, for personal contributions. But if you claim a deduction

for personal contributions you may not be eligible for the government’s co-contribution.

BONUSES

While you are not permitted to salary sacrifice accrued annual leave or long service leave, you can salary sacrifice your bonus. The catch is that you must come to an arrangement with your employer before you are paid a bonus, not afterwards.

This means you must tell your employer that you will salary sacrifice part or all of your bonus (up to the $25,000 contributions cap) before you have been notified of the amount of the bonus. However, if you want to salary sacrifice your bonus after you have been notified, it can be a non-concessional contribution and come out of your after-tax salary.

HIGH INCOME EARNERS

If you earn over $250,000 you will pay 30% on any salary sacrificed amounts. This applies to only 2% of income earners.

CONTRIBUTION CAPS

There are restrictions on how much you can put into super. You can contribute up to $25,000 for concessional (before-tax) amounts. This includes your employer’s 9.5% guarantee payment. If you go over the contribution cap you will be taxed at a higher rate.

If you can spare the money, you can really boost your super by making non-concessional (after-tax) contributions. You will usually save more by investing through super than by investing in the same assets outside super.

The annual non-concessional contributions cap is $100,000, or $300,000 using the threeyear bring-forward rule.

An automatic payment plan is the best way to save because the money is taken from your pay before you even see it