A boom time for sacrificing
Whether it's anti-war protests or being at the forefront of gender equality, boomers have always left their mark.
Yet the evidence suggests boomers have not been adequately preparing themselves for retirement.
Big super funds regularly put out surveys on how people are preparing for retirement. The latest, a study of 1200 people aged over 50 by the industry super fund REST, found just 14 per cent felt "financially prepared" for retirement. Fifty-one per cent said they were "somewhat" prepared financially, and 35 per cent said they were "completely unprepared".
That's surprising, given the efforts this generation, born between 1946 and 1965, have taken to ensure they miss out on little.
There are several likely reasons for this lack of preparedness. First, boomers have not had the benefit of the superannuation guarantee for the whole of their working lives, because compulsory super only started in 1992.
Second, the younger boomers have had what economists call delayed household formation. They married or partnered later in life, had children later and took out a mortgage later. The consequence is that many boomers in their 50s still have a big mortgage and children at home.
Third, there was the GFC, which left all boomers with a smaller retirement nest egg than they were expecting and a diminishing number of years to compensate.
As to the solution, it is hard to go past salary sacrificing into super.
Each dollar of pretax pay put into super is taxed on the way in at 15 per cent instead of the investor's marginal income tax rate, though the tax is higher for those earning more than $300,000.
Yes, there is an annual limit on how much can be sacrificed of $25,000 - and this includes the 9 per cent superannuation guarantee. But the complaints about the lowering of the cap are coming from high-income earners; most people with a mortgage and kids at home will not come close to the cap.
The risk of investing inside super has to be managed. As people get closer to retirement they should lower their exposure to risky investments. Super funds have a range of diversified investment options, with a range of risk-versus-return trade-offs.
And most super funds can give members advice over the phone on appropriate asset allocation, given the members' goals and attitudes to risk.
Frequently Asked Questions about this Article…
According to a REST study of 1,200 people aged over 50, only 14% felt "financially prepared" for retirement, 51% said they were "somewhat" prepared and 35% said they were "completely unprepared." The data suggests many boomers are not as ready for retirement as commonly assumed.
The article cites three main reasons: compulsory superannuation (the superannuation guarantee) only began in 1992 so many boomers missed years of compulsory contributions; younger boomers tended to form households later so some still carry big mortgages and have dependent children in their 50s; and the Global Financial Crisis left many with smaller retirement nest eggs and fewer years to recover.
Salary sacrificing means putting pre-tax pay into your superannuation account. Those contributions are taxed on the way in at 15% rather than at your marginal income tax rate, so it can boost retirement savings and offer tax efficiency for many earners.
There is an annual cap of $25,000 on concessional (pre-tax) contributions, and this cap includes the employer 9% superannuation guarantee. While some high-income earners complain about the cap, most people with mortgages and children at home are unlikely to reach it.
Concessional contributions are generally taxed at 15% on the way in, but the article notes the tax is higher for those earning more than $300,000, so high earners can face a higher effective tax rate on contributions.
Yes. The article recommends managing the risk of investing inside super by lowering exposure to risky investments as you near retirement. Most super funds offer a range of diversified investment options with different risk-versus-return trade-offs to match members' timelines and risk tolerance.
Yes. The article says most super funds can provide members with advice over the phone about appropriate asset allocation based on individual goals and attitudes to risk, which can be helpful when adjusting investments as retirement approaches.
The Global Financial Crisis reduced the value of many retirement nest eggs, leaving boomers with smaller savings than expected and fewer years to make up the shortfall before retirement, contributing to the current lack of preparedness.
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