Not Such a Super Time

Many Superannuation funds have been taking a tumble in recent months, reflecting share market falls.

This is leading some people to look more closely at the options for their retirement.

Australian and international shares have declined sharply in value over recent months. This is unwelcome news for the 90% of working Australians with their retirement savings in superannuation funds, as these funds are heavily invested in the Australian and overseas share markets.

In such a volatile environment, people are wondering if they should be moving their money into a “safe haven” such as cash deposits. They’re also asking how much super they’ll need for a comfortable retirement and will they make it.

Tax-effective vehicle

Superannuation is a tax-effective vehicle for investment. In other words, superannuation is a way to invest in many of the same things as you’d invest in outside super, while paying less tax.

The government puts limits on how much you can contribute at the lower tax rates. To find out more about tax and superannuation, go to the Australian Taxation Office website www.ato.gov.au.

Asset classes

The main asset classes that you can invest in, ranked from low to high risk (and expected return), are:

• Cash
• Fixed interest
• Property
• Shares

Super funds normally offer a choice of different mixes of these asset classes, ranging from very conservative to very aggressive in terms of the risks and potential returns. When making your decision, it’s important to find a match between your investment timeframe, the returns you expect and your attitude to risk. Can you tolerate short-term market fluctuations in the expectation of better average returns over the long term, for example?

Interestingly, 90% of super fund members are invested in their fund’s "default" option which is diversified across different asset classes, so spreading the risk.

According to the Australian Consumers Association, these default funds have on average about 60% of their money in shares, 20% in fixed interest, 10% in property and 10% in cash – although these percentages can vary widely from fund to fund.

How much do I need?

The Association of Superannuation Funds of Australia (ASFA) produces a regular report estimating the weekly and annual household expenditure for an adequate and a comfortable retirement. There are regional differences, and perceptions of a "modest" or "comfortable" lifestyle vary, but the figures give an idea of what you need to spend each year.

The estimates are that:

• For a "modest" lifestyle, a single person retiring now would need $363 per week ($18,900 per year), whilst a couple would need $509 per week, or $26,500 per year.

• For a "comfortable" lifestyle, a single retiree would need $702 per week ($36,600 per year), whilst a couple would need $939 per week ($48,900 per year).

Of course, these are averages and individual needs vary. Financial planners often use the guideline that you’ll need 60–70% of your pre-retirement income, each year, in order to be comfortable in retirement.

Others think even this isn’t enough, and that a mistake people make is thinking that their cost of living will dramatically reduce when they retire.

On this basis you could aim for a retirement income that’s equal to the after-tax income you earned before retirement.

For example, a couple with salaries of $50,000 and $75,000 will take home about $98,000 after tax, so that’s roughly the income they should aim for. It’s a tall order though — a lump sum of about $2 million would be needed to generate that income!

Age pension

The maximum Age Pension rate, including the pharmaceutical benefit, is $552.60 per fortnight ($276.30 per week) for singles and $919.40 per fortnight ($457.80 per week) for couples. However, your income and assets need to be below certain thresholds to qualify.

You should contact Centrelink or visit www.centrelink.gov.au for details of the income and asset test thresholds, as the rules are quite detailed.

However, even the maximum age pension payments fall short of the income needed for what the ASFA define as a comfortable or even modest retirement, so super is generally the way to cover the shortfall.

Estimate your needs

In order to estimate whether you’re on track to accumulate your required super balance, you can use one of the free online calculators such as the one offered by the government on the Fido website www.fido.gov.au.

Making super go further

• Salary sacrifice. If your employer allows it, making additional contributions from your pre-tax salary is an effective way to boost your super and pay less tax

• Free money from the government. Under the co-contribution scheme, people who earn less than $58,980 per year as employees, and who make an after-tax super contribution, can get an additional contribution from the Federal Government. It works on a sliding scale of up to $1500 per year.

• Make a contribution on your spouse’s behalf. Tax offsets can be claimed (up to a limit) on super you pay on behalf of your spouse if they have a low income, or no income at all.

• Make after-tax contributions. They are taxed at lower levels, but there are annual limits for different age groups.

• Road test your fund. How does your fund compare to others not only in terms of gross returns, but also net returns after fees and commissions.

• Don’t retire! Many people continue to work after normal retirement age, albeit on a reduced hours basis, so are often not withdrawing much from their superannuation funds until they are much older.

Conclusion

Regardless of what other investments we may have (eg in an investment property) we should all take an interest in our super investment portfolios.

As we’ve seen, though, super can be a complex area with investment decisions, taxation implications and long term estimates of value and needs. If you don’t feel that you have a good understanding of where you stand and where you’re heading, then you should seek some licensed financial advice.