Closing the super savings gap

When you’re in your 30s and 40s, retirement can seem a long time away. But recent research suggests that unless you increase your super savings now, there may be a significant gap between the retirement you imagine and the one you can actually afford.

Fact: Most Australians are financially unprepared for retirement, partially because we are living longer than ever before and we have higher expectations of our retirement lifestyle.

Research conducted by Rice Warner Actuaries reveals that Australia has a shortfall in super of close to $1 trillion[1].

How much is enough?

How much you need depends on you, eg where you live, your desired income, your desired lifestyle, etc.

According to the Association of Superannuation Funds of Australia (ASFA), the average couple needs at least $510,000 to fund a comfortable retirement, while a single person needs at least $430,000 (both calculations assume receipt of part Age Pension) If you’re only relying on your employer compulsory super contributions to meet this retirement goal, you could be in for an unpleasant surprise. Here are some more facts:

• If you’re earning $50,000 a year, your lump sum benefit after 30 years of employer contributions would be just $183,000 (assuming 9% super guarantee contributions, investment earnings of 7% and current tax rates)[2]
• While the gradual increase in the super guarantee rate to 12% by 2025 will go some way towards closing this gap, it’s unlikely to be enough2

What does this mean for you?

If you’d like to make a difference to how long your super will last through retirement, you should consider the following:

1. Set your target. It’s important to understand how much you will need to have the retirement you want. While too many this may seem obvious, research by Investment Trends shows that 68% of Australians haven’t set a target for their retirement savings or income[3].
2. Salary sacrifice. Making regular contributions from your pre-tax salary into your super is a simple way to help boost your retirement funds. The amount you sacrifice into super will generally be taxed at 15%, or 30% if you earn over $300,000. But this is likely to be less than the marginal tax rate you pay on your salary, which is currently up to 49%.
3. Think about co-contributions. For people earning up to $49,488 a year (before tax), making an after-tax payment to your super could make you eligible for a Government co-contribution of up to $500 — effectively boosting the value of your contribution.
4. Add to your spouse’s super. When one partner takes time off to care for children or elderly parents, they lose the benefit of regular super contributions, adding to the super gap. To help counter this, the Government offers a tax rebate of up to $540 when you contribute up to $3,000 into your spouse’s super, provided they earn less than $13,800 in the year.
5. Make a lump sum contribution. Have you recently received a lump sum payment? Whether it is a bonus, an inheritance or a redundancy payout, you may be better off putting it into super, or using it to supplement your income and increasing your pre-tax contributions.

The best strategies for you will depend on your personal circumstances, including how much tax you pay. You should also be aware that other eligibility requirements may also apply in relation to each of the above strategies, and that there are caps (or limits) on how much you can contribute to super before penalty tax rates apply. So before you decide how to close your super gap, you should talk to us to find out what’s right for you.

[1] Rice Warner Actuaries, ‘Longevity Savings Gap’, Sep 2012.

[2] ASFA Retirement Standard, Sept 2014.

[3] Investment Trends, November 2011 Retirement Income Report.

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