Time to get focused

Reaching your 40s can be a time of established careers, teenage kids and a mortgage that is no longer daunting.

There are still plenty of demands on the budget, but by this age there’s a good chance there’s some spare cash that can be put to good use.

As you pass the halfway mark of your working life, it’s time to give retirement planning a bit more attention.

A 45-year-old today will reach ‘retirement age’ in 22 years. Taking inflation into account a couple will, by then, need an income of about $117,882 a year if they want to enjoy a ‘comfortable’ retirement.

With the government expecting us to be self-sufficient in our old age, the nest egg required to fund that lifestyle could be more than $2-million. So, what can you do to have $2-million waiting for you in two short decades’ time?

A beneficial sacrifice

At this age, a popular strategy for boosting retirement savings is ‘salary sacrifice’, in which you take a cut in take-home pay in exchange for additional pre-tax contributions to your super. If you are self-employed, you can increase your tax-deductible contributions, within the concessional limit, to gain the same benefit.

Salary sacrificing provides a double benefit. Not only are you adding more money to your retirement balance, these contributions and their earnings are taxed at only 15 percent. If you earn between $90,001 and $180,000 a year that money would otherwise be taxed at 39 percent.

Sacrifice $1000 a month over the course of a year and you’ll be $2880 better off just from the tax benefits alone.

It’s important to remember that if combined salary sacrifice and superannuation guarantee contributions exceed $25,000 in a given year the amount above this limit will be added to your assessable income and taxed at your marginal tax rate.

What about the mortgage?

Paying the mortgage down quickly has long been a sound wealth-building strategy for many. Current low interest rates and the tax benefits of salary sacrifice, combined with a good longterm investment return, means that putting your money into super produces the better outcome in most cases.

One caveat – if you think you might need to access that money before retiring, do not put it into super. Pay down the mortgage and redraw should you need to.

Let the government contribute

Low-income earners can pick up an easy, government-sponsored, 50 percent return on their investment just by making an after-tax contribution to their super fund.

Not surprisingly, there are limits, but if you can contribute $1000 of your own money to super you could receive up to $500 as a cocontribution.

Another strategy that might help some couples is contribution splitting. This is where a portion of one partner’s superannuation contributions are rolled over to the partner on a lower income.

With debts and dependants, adequate life-insurance cover is crucial. Holding cover through superannuation might provide benefits such as lower premiums, a tax deduction to the super fund and reduced strain on cash flow.

Finally, review your superannuation death-benefit nominations to ensure they remain relevant.

Seek professional advice

The 40s is an important decade for wealth creation with many things to consider, so ask your licensed financial adviser to help you make sure the next 20 years are the best for your super.