Making smart choices about your superannuation in the years before you retire can make all the difference to your life after work.
While super isn’t the only way to save for retirement, it is currently the most tax-effective way to store your savings.
As the retirement age increases and the age pension becomes harder to qualify for, retirees are encouraged to plan to be self-funded, with any government benefits being a bonus.
Not sure where to start? We quizzed certified financial planner, Wayne Leggett from Paramount Financial Solutions for his advice on maximising your superannuation.
How do I know if I will have enough super?
"The first step in determining how much super you need is to estimate your desired level of retirement income. While financial situations differ, it’s amazing how frequently a $1,000 per week target is set.
"Once the target income has been set, the next step is to determine how much capital is required to generate the desired level of earnings. When planning retirement income, it pays to be cautious. In terms of investment earnings, this means assuming a long-term total return of 5 per cent. Rounding our $1,000 a week target to $50,000 a year for ease of calculation, and using our assumed 5 per cent earning rate means we will need $1 million earning 5 per cent to generate the desired level of income.
"Well, it’s what it would mean… except for one minor detail; inflation. Over time, this has the capacity to seriously erode the buying power of your $50,000. To offset its impact, a 'rule of thumb' is that you should have between 50 to 100 per cent more capital than the income you require, depending on how young you plan to retire.
"In other words, someone retiring at age 70 might be okay with $1.5 million, whereas someone aiming to retire at 65 may be advised to aim for $2 million in super before they can be confident of not outliving their capital.
"Of course, these figures usually apply to a retiring couple and do not account for assistance from Centrelink or accessing the equity in the family home. Basically, many retirees retire comfortably with much less in super. But it never hurts to aim high."
Should you put more money into your super or pay down your mortgage faster?
"Under current laws and at present earning and interest rates, this one really is a no-brainer. With the long-term return rate of a well-managed and balanced super fund sitting at around 7 per cent, and the typical home loan interest rate sitting at around 3.5 per cent, a dollar in super is likely to do twice as well as it would in reducing your home loan.
"Factor in taxation; if you make a pre-tax contribution to your super, you get to invest 85 cents once contributions tax is factored in, while a dollar of salary only leaves you 70 cents at the most. This tax 'bonus' makes the super option even more attractive."
Is it wise to be paying off your credit card and other debts before you start contributing to your super?
"While the above strategy favours super when compared to home loan interest rates, the pendulum swings the other way with credit card debts, which can incur interest at anywhere between 13 to 22 per cent per annum. Irrespective of your age, clear your credit cards before adding extra to super."
If you decided to salary sacrifice an amount each paycheck, what advice do you have on determining an amount? Should you get this agreement in writing from your employer? And does this bring your taxable income down?
"Under current rules, it is possible for any taxpayer to contribute up to $25,000 in pre-tax dollars each year, be it through their employer or personally. So, while you need to involve your employer if you wish to 'salary sacrifice', personal contributions are now equally tax effective."
What are concessional contributions? And what limitations do you have with this?
"The term 'concessional cap' refers to the amount that can be contributed to super in any tax year using pre-tax (tax deductible) dollars. This is available to all adult taxpayers under the age of 75, although those over 65 need to pass a work test.
"What’s more, if you’re under 65, you can catch up any shortfall from prior years on this concessional cap for up to five years, depending on how much you already have in super."
Can the government help with super contributions? How do I know if I am eligible?
"Apart from assisting with concessional taxation rates on contributions, the government also provides assistance for lower income earners by adding to personal contributions in the form of what is known as a co-contribution.
"This is an arrangement under which the government encourages those on lower incomes to voluntarily add to their super by making a top-up contribution based on the contribution made by the taxpayer and their marginal tax rate.
"Other incentives include the ability to release equity from sale of your home to make a contribution to your super. These are known as downsizer contributions. ASIC’s Moneysmart website is an excellent resource for checking eligibility and entitlements."