Retirement can seem a long way off, but when it comes to super, women in particular need to start taking action, and the younger the better.
For most millennials, it’s easy to assume that your super will take care of itself. After all, employers will just keep making the compulsory contributions on a regular basis, and the money will add up until it’s needed in 30 or 40 years’ time, right?
But the average superannuation balance of women between the age of 30 and 34 for the 2013/2014 financial year was only $25,550.
The Association of Super Funds of Australia (ASFA) has calculated that, to live a comfortable lifestyle from age 65, you need an annual income of $42,893 for a single or $58,922 for a couple.
A comfortable lifestyle is one where you can eat out at restaurants, have an annual holiday, own a decent car, and go to a good hairdresser.
But the bad news is that, with only $25,550 in super now, a comfortable lifestyle in retirement may not be on the cards for many women.
As a rule of thumb, to sustain an annual income of $43,000 you need approximately $860,000 in investment wealth if you want to preserve your capital base and live off the investment earnings.
How do you get there?
It will take time and planning but by starting early it is possible to grow superannuation savings – so millennials have time on their side.
The best strategy is:
- Have an appropriate investment option. Super is a life long investment that isn’t accessible until at least age 60 (except in special circumstances). You can take more risk when you have the benefit of a long investment time frame.
When retirement is at least 30 years away, consider adopting a more aggressive investment strategy where 100 per cent of your balance is invested in growth assets such as Australian and international equities and property.
While these asset classes are more volatile in the short term they provide the opportunity for higher investment earnings and capital growth. With 30 years to retirement there is the time to ride out the short term market volatility.
A default super option is likely to only have 70 per cent growth assets and 30 per cent cash and fixed interest assets. With the low interest rate environment that we seem locked into, over a 10 year plus time horizon growth assets will provide a much greater return.
- Consider salary-sacrifice contributions as you approach retirement age to boost superannuation savings.
Here is an example. At 30 years old, Sarah earns $80,000 a year. She currently has $25,550 in her superannuation account, invested in a growth option with an average real return of 6 per cent per annum.
Over the next few years, Sarah starts a family. In total, with maternity leave and childcare, she takes a two year career break where no superannuation is contributed, and has three years of part-time work where contributions are halved.
If Sarah just relies on the compulsory superannuation guarantee contributions from her employer until she is 60, her superannuation balance will reach just over $700,000.
To boost her savings in the lead up to retirement, a good strategy for Sarah is making salary-sacrifice contributions. This can be a great way to save as the contributions are automated by an employer. It will reduce personal cashflow but due to the personal tax savings (for those who earn more than $37,000 a year), the outcome is usually that more goes into superannuation than the take home pay is reduced by.
If, from age 45, Sarah makes salary sacrifice contributions up to the $25,000 annual cap, her superannuation savings will increase to $909,856 by age 60, adding $204,451 to superannuation.
Finally, make sure you have the basics right:
- Consolidate superannuation balances as having multiple accounts isn’t effective. Often when moving jobs, people start a new superannuation account and the balances of old super accounts could be eaten up by fees when contributions are no longer being deposited.
- Don’t pay too much in fees. Weigh up the fees charged by the current superannuation fund and compare them to those charged by similar funds.
- Make sure insurance cover is appropriate for your needs as the premiums are paid out of your contributions.
- Plan for career breaks like maternity leave. Consider spouse contributions during career breaks and salary sacrifice later in your career to make up missed contributions. The Government’s proposed five year catch-up concessional contributions for those with super balances under $500,000 could also be considered.