A little early sacrifice goes a long way
Last year, the portion of survey respondents who told the Gallup survey they would have enough money was less than 40 per cent. Recognition that they will not have enough is at least the first step. The harder part is doing something about it. Not least because "doing something about super" tends to get shunted down the list.
Reluctance could also be because the solution means cutting back on spending now in order to have more income in retirement. The answer is boring, but it works. It is to salary sacrifice a set amount of money from each pay packet into super.
Over time, it makes a big difference to the standard of living in retirement.
My favourite retirement planner is the one provided by ASIC on its MoneySmart website at moneysmart.gov.au. If you have never had a look at it, you should.
It shows not only how much income your super balance is likely to generate in retirement, but what actions can be taken to grow the super balance and increase retirement income. The planner has "defaults" on super fund earning rates, etc.
But these assumptions can be tweaked to account for personal circumstances.
By playing with the numbers you should quickly get a handle on how you are tracking for retirement. Importantly, the planner takes into account any age pension that the retiree would likely receive. It shows the power of salary sacrificing.
Let's assume two 50-year-old home-owners, who want to retire at age 65, each have $150,000 in super and each earns $80,000 a year. The MoneySmart planner shows the couple can expect a retirement income, including a part age pension, of $50,000 a year until age 90, after which time their income drops back to the age pension of $31,000. Now, let's put into the calculator that the pair each salary sacrifice $200 a fortnight into their super.
Their retirement income rises to almost $55,000 until age 90. That is almost the $56,000 a year suggested by the ASFA Retirement Standard as the income needed to fund a "comfortable" retirement. It may seem that salary sacrificing $400 between them each fortnight is a big ask. But it does not mean a reduction in their take-home pay of $400 a fortnight.
By salary sacrificing, the 34 per cent that would have been paid in income tax is replaced by the 15 per cent super contributions tax. Using current income tax rates, the couple's marginal rate, plus Medicare, is 34 cents in the dollar. So their combined fortnightly take-home pay is reduced by $264.
Frequently Asked Questions about this Article…
Salary sacrificing means directing a set amount from each pay packet into your superannuation before it reaches your take-home pay. Over time those extra pre‑tax contributions can significantly grow your super balance and increase the retirement income you can expect.
Salary sacrificing typically reduces the income tax you’d otherwise pay on that portion of pay and instead attracts the 15% super contributions tax. In the article’s example, a combined $400 a fortnight salary sacrifice reduced the couple’s combined take‑home pay by $264 because their marginal tax plus Medicare was 34% while contributions were taxed at 15%.
Even relatively small, regular sacrifices can add up. The article’s example had two 50‑year‑olds each salary sacrificing $200 a fortnight and their projected retirement income rose from about $50,000 a year to almost $55,000 a year until age 90.
The article recommends ASIC’s MoneySmart retirement planner at moneysmart.gov.au. The planner estimates the income your super balance could generate, shows actions to grow your balance, includes default earning assumptions that you can tweak, and factors in likely age pension payments.
The planner uses default assumptions for super fund earning rates and other inputs but lets you adjust those assumptions to reflect your personal circumstances. By changing the numbers you can quickly see how different actions — like salary sacrificing — affect your projected retirement income.
The MoneySmart planner takes into account any age pension the retiree would likely receive and includes it in the projected retirement income. In the article’s example the couple’s income projection included a part age pension and showed their income falling back to the age pension level after about age 90.
The article cites a Gallup survey showing a decline in confidence: about 10 years ago almost 60% of people believed they would have enough money for a comfortable retirement, while last year fewer than 40% said the same. The author notes recognising the shortfall is a first step, but taking action is the harder part.
The article compares the couple’s projected income after salary sacrificing to the ASFA Retirement Standard’s figure for a comfortable retirement. With the $400 combined fortnightly salary sacrifice their projected income rose to almost $55,000 a year, which is close to the ASFA suggested comfortable level of about $56,000 a year.
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