High property prices problematic
Many people will struggle to own the roof over their head by retirement.
Many people will struggle to own the roof over their head by retirement. Buying a home used to be the biggest financial decision many of us would make but a trend for people to delay or even eschew home ownership has ramifications for the way younger people approach super.A research paper by the REST industry super fund predicts that in 15 to 25 years' time, perhaps one in four Australians will retire without owning their own home. This compares with the 15 per cent of retirees who do so now.Some of these people will have deliberately chosen not to own a home, while others will have been unable to afford to get into the market, particularly in the major cities, the chief executive of REST, Damian Hill, says.In between will be the people who retire with significant mortgage debt, either because they took out a mortgage later in life and therefore had less time to pay it off, or because high prices meant their mortgage was large."What we're more likely to see is that people are going to retire with a mortgage to pay off, so part of their super savings will actually be used to pay off what remains on the loan," Hill says.This trend needs to be factored into calculations about what sort of nest eggs people need and into the financial advice people are given, he says.GREATER NEST EGGConventional wisdom has been that younger people should think carefully before contributing extra to super because - unless they encounter exceptional hardship - the money is locked away until their official retirement age, currently 60 for someone born after June 30, 1964.But Hill says perhaps younger people should treat voluntary contributions into the tax-effective environment of super as "pre-payments" towards the mortgage they may well take out later and may still need to clear upon retirement. "This is really a long-term savings approach," Hill says. "If you're not putting as much focus into owning a home then you should make sure you still put money away."The head of technical services for financial advice group ipac, Colin Lewis, isn't convinced that saving has to go into super but he says there is certainly an issue here."There is a genuine argument that if you aren't going to own a home then, come retirement, you do need to have a greater nest egg, to fund a more expensive lifestyle where you are paying rent," Lewis says."There are different ways of building that nest egg - but it is about doing something, rather than nothing."The enforced saving that a mortgage represents could be replaced with a regular savings plan that automatically diverts money to investments such as managed funds or direct shares, he says.He notes that in retirement it's possible to earn about $16,000 a year from investments held outside super and still pay no tax.That said, a younger person might be surprised at the impact of topping up their super by only a modest amount, Lewis says. It could be that for the price of a carton of beer a week, they could retire with $100,000 extra if they start soon enough.Hill says people should be setting themselves some targets for super at an early age. People will review a mortgage to see how they're going - how long it will be before it's paid off, or what effect lifting their repayments might make to the result - "but they don't necessarily put as much effort into seeing where they're heading with their retirement savings," he says."We want people to do a 'health check', we want them to spend as much time on their super - 'What's my balance? What if I pay a bit extra? Where do I want to be, as far as some interim steps?'"Don't just get to 65 and find you're not there," Hill says.REST has a super and retirement calculator at rest.com.au/Tools -Resources/Calculators that models potential retirement outcomes.Input your current age, salary and super balance and it will generate an estimated retirement balance. You can then adjust settings to see how long that money will last depending on the annual income you draw, how retiring later affects the result and what impact one-off or regular personal contributions could have.REST says there are several ways for younger people to boost their super:- Exercise investment choice- Make pre-tax contributions to super via salary sacrifice.- If you're eligible, make contributions that attract the government co-contribution.- Top up your spouse's super and receive a tax rebate.- Consolidate multiple super accounts and save on fees.- Find lost super via SuperSeeker at ato.gov.au/individuals.Key points- There are signs young people are forgoing or delaying home ownership.- This may have an adverse impact on their personal wealth at retirement.- They may need to accumulate more super to fill that gap.- Extra super may be required to pay off the remaining balance of a mortgage.