Are you worried about not having enough for retirement? Australians are fortunate that there is a strong system in place for retirees to enjoy a good standard of living. Between Superannuation and the Age Pension, most of us can look forward to a comfortable retirement without too much worry. However, it’s worth taking a look at your super and your personal investments every few years to ensure that you’re on track with your retirement savings. Taking into consideration your desired standard of living in retirement, it may become clear you may not have quite enough when retirement draws near. So what do you do? Here are our top tips to boost your retirement savings when your Superannuation balance is looking a bit low.
Your Super Contributions are Limited
The main problem many run into, particularly high-income earners, is that there are limitations on how much you can contribute to your superannuation each year. For example, superannuation contributions cap out at $27,500 in pre-tax dollars for 2022, and this amount includes any contributions you voluntarily make through salary sacrifice. If you’re already hitting your cap, boosting your retirement savings may not be as simple as deciding to contribute more money into your super.
How You Can Boost Your Retirement Savings
There are other options for you to boost your retirement investments outside of your normal superannuation contributions.
Combine Your Past Super
Ensure you’re making the most of your super fund by combining all of your funds into one. If you have an employment history that spans multiple jobs and you’ve never combined your super into one account, you will likely have multiple underperforming superannuation accounts. Roll all of your super accounts into your current fund and enjoy the benefits of compound interest on all your hard-earned money.
Spousal Contributions
If one spouse earns less than $37,000 annually, the higher-earning partner can contribute to their spouse’s super. If you put at least $500 into your spouse’s super, you could get an 18% tax offset for those contributions, up to a maximum of $3,000. If you are earning more than your partner and would like to top up their retirement savings, you may want to consider making spouse contributions.
Salary Sacrifice
If your current income provides plenty of cash flow, salary sacrificing can be an efficient way to boost your super balance while potentially enjoying tax benefits. To salary sacrifice, you can ask your employer if they’re willing to contribute a certain amount of your pre-tax earnings, or your bonus, to your super. Keep in mind that you’re still capped at the $27,500 contribution limit for these pre-tax dollars.
For higher-income individuals, you’ll pay an extra 15% on your pre-tax contributions (for a total tax of 30%), but that is still substantially lower than the 47% marginal tax rate you’d pay otherwise. Please remember that these are simple examples, and talk with your tax advisor about your personal tax ramifications before you sign up for salary sacrifice.
After-tax Contributions
You can also put your “own” money into your super. These contributions are made on an after-tax basis, but could be tax-deductible. If you get a cash windfall—an inheritance, proceeds from the sale of an asset, or bonuses, you can put some of that money into your super and pay a lower tax rate on those funds. If you have extra cash from an asset sale, the tax rate on a super contribution is typically less than the capital gains tax you’d pay otherwise.
If you’re interested in making after-tax contributions, talk to a tax professional to work through all the tax scenarios before making any decisions.
Shares
To contribute to your superannuation, you can also invest in shares. High-earners often prefer this to over-investing in their super, as investing in shares allows for total control of the investment and can be liquidated without penalty. We’re referring to any investment outside your super as “shares”, although you can also invest in real estate, commodities, bonds, private equity, and the stock market.
There are two basic ways to invest in shares. A well-balanced portfolio includes both defensive funds, which can hedge against recession and protect capital and growth funds, which are more aggressive and therefore riskier.
Defensive Investing
Defensive investments are short-term investments designed to diversify a portfolio and provide guaranteed income. The return on these investments is relatively low, typically in the 3-4% per annum range, but is safe and secure. As retirement nears, these defensive moves are more attractive because of the low risk and income guarantees.
Growth Investing
There is no question that growth investing can be more exciting than defensive investing. The risks are greater, but so are the rewards. In fact, a 6% yearly return is not uncommon for growth investments. Additionally, alternative investing (such as private equity, infrastructure, and commodities) can offer even greater returns—although with commensurate risk.
Your Financial Advisor’s Role
When you’re investing, the typical approach is to weigh your portfolio towards growth in the early stages of your career, reaping years of capital growth and dividend reinvesting, and move towards the safer harbour as retirement nears—interested in learning more? Take advantage of a financial advisor’s expertise and experience when developing your investment profile.
Speaking with a financial advisor at Super Network can help you formulate a retirement savings plan to ensure you can retire comfortably. Contact us today for a free, no-obligation discussion about your savings and investments.
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