Retirement reality check

David Potts examines three case studies to analyse their strategies for life after work.

David Potts examines three case studies to analyse their strategies for life after work.

An entire industry has grown around telling you how poor youll be in retirement. As if you need reminding.

As a rough rule of thumb, $1 million at 65 (or about $1.25 million at 60) will give a comfortable lifestyle, which the Association of Superannuation Funds of Australia (ASFA) retirement standard says is $55,080 a year after tax.

But it depends on what you earned in the meantime because that will determine what you consider comfortable, whether youve paid off the mortgage, expect an inheritance, are going to downsize your home or move interstate, and how long you live.

Super is a great tax break but isnt the be-all and end-all of a decent retirement, either.

Under the seniors and pensioners tax offset (forever destined to be called SAPTO), a retired couple over 65 could earn up to $57,948 a year without paying a single cent in tax.

Thats more than twice the ordinary tax-free threshold.

Yes, youd be living an ASFA-designated comfortable lifestyle tax free.

It raises the question of whether you should keep money outside super because the tax position is no different, Philip LaGreca, of DIY super administrator Multiport, says.

Also, if youre close to retiring and up against the contribution caps for super, invest the extra somewhere else because earnings up to $32,279 (single) or $57,948 (a couple if both eligible) a year are tax free anyway.

The only downside is slightly less favourable social-security treatment under the income test, LaGreca says. Granted, earning that $57,948 in the first place is the challenge.

But as these three case studies show, super isnt the only or even best way of saving for retirement.

Often paying the mortgage off faster is better.

CASE STUDY 1

The Eldridges, both 44, pictured, have just bought a house in Sydneys inner west. Karen, a data analyst, had time out raising three children.

We moved from a tiny flat, so Im still buying furniture and were both cooks so were enjoying our nice new kitchen, Karen says.

The couple have about $130,000 in super with First State Super. Karen moved to it seven years ago because the fees in the company one were exorbitant.

They have a mortgage of $650,000 and $150,000 in equity. Theres $35,000 in the offset account. The only other debt is a $25,000 car loan.

Todd is salary sacrificing the maximum into super.

Paul Moran, Paul Moran Financial Planning: Your current contributions will allow for a reasonable retirement income of about $60,000 a year in real terms, assuming you work right through without interruption. Because there are no guarantees in life, you should really both be maximising your contributions to super now if you can afford it.

Your contributions will reduce tax from 38.5 per cent to 15 per cent for the amount sacrificed, which gives you an effective 27 per cent return on the money, a fact that puts some perspective on peoples short-term focus on returns.

Your mortgage will require repayments of about $1100 a week to complete within the next 21 years and so working out your budget should start there. Always repay debt with the highest interest rate first, and so additional mortgage repayments should apply once other loans are completed. Having a car loan and an offset account doesnt actually make financial sense, although I know people prefer to have a buffer in the bank.

It looks like you will have debt right up to your retirement. Life and income insurance should be a high priority for you both.

Tony Harris, MakingCents: Youre off to a great start at your age and were proactive in moving your super to a better fund. But you have a big mortgage. Putting $35,000 in the offset account is a good move.

I suspect Karen has a bit of a flair for house decorating. Id encourage her to go for a second property. You should build up the offset account, which in turn builds up equity.

Your borrowing capacity would be close to $900,000. You should have built up enough equity in two years to be able to buy an investment property.

Reality check: Going well. Attack the mortgage maybe consider a geared property investment.

CASE STUDY 2

After 10 years in Germany, where Erica Kirby says the winter was nine months long, she shouldnt feel the cold at her nude modelling sessions.

The part-time model, software expert and sailor gave up full-time work eight years ago because a life was more fun.

The Kirbys, in their late 40s, have accumulated about $175,000 in super and Mark, an IT project manager, salary sacrifices a bit each month. They also have a geared investment in an MLC managed fund.

When they turn 65 theyll also be entitled to a German pension which, being Germany, they already know will be $800 a month. Their mortgage costs $790 a week.

Suzanne Haddan, BFG Financial Services: You are making substantial home-loan repayments, leaving little room for other wealth-building opportunities.

If the payments are above the minimum required, consider reducing them and salary sacrificing to super.

Paying extra off the home loan effectively earns you the loan interest rate of about 6.5 per cent. Salary sacrificing will immediately earn 23.5 per cent due to tax savings on a marginal tax rate of 38.5 per cent.

Further, the money invested earns interest in your super fund. At retirement, the funds can be withdrawn tax free and used to pay the home loan if theres an outstanding balance.

By age 67, a comfortable retirement should be achievable with 20 per cent of your income coming from the German pension, a small Australian one and the balance from investment income.

Paul Moran, Paul Moran Financial Planning: A successful retirement has two key financial requirements  a roof over your head that you own and a reasonable income. So ensure that your current repayment level will extinguish your mortgage over the next 12 to 15 years.

With your German pension providing some of your income (remember that Erica will turn 65 later than Mark), you will still need to be able to produce about $50,000 a year (in future dollars). This requires somewhere in the vicinity of $700,000 to $800,000 (in future dollars) to produce.

I think on current contribution levels you will be short and you need to salary sacrifice $1000 into super each month. A geared investment is a higher-risk option and my priority is to salary sacrifice first, which is lower risk.

Reality check: On the right path. Put more in super, or gear into property.

CASE STUDY 3

Dennis Maddock was in the Army for 15 years and is still in the Reserves, which takes up all his spare time. It has its own super fund and hes also in the fire brigades fund.

As a contract consultant Dennis, 36, has to make a 9 per cent super contribution to himself, but has no fund for it.

Hed rather use the money to invest, but in the meantime theres $8000 sitting in the bank waiting to find a super fund.

Hed like to combine his super into one or the other ($60,000) or, better still, all in a new fund, but has been told this isnt possible.

Hes also thought of negative gearing into property but I wouldnt do it at the moment because I dont think property prices are going to rise for a while.

He is single and has a flat with a $150,000 mortgage.

Mike Ingham, principal consultant, Obelisk Advisors: Usually super is portable, meaning you can transfer it from one fund to another and consolidate it into a single fund. However, your Army reserve super benefits must be held with the Military Super scheme and cannot be consolidated.

You can, however, choose which super fund you make contributions to as a self-employed consultant. Compare the fire brigades fund, ESS Super, with a few other super funds. Yes, competitive fees and charges are important but so, too, is the range, suitability, the performance of their investment options and the insurance offering. I am a fan of industry super funds but only choose one that offers unit-priced investment options. Avoid any using a crediting rate to allocate investment earnings.

Suzanne Haddan, BFG Financial Services: Retirement age is a long way off but you are in a good overall financial position. Focus on accelerating the repayment of your home loan as the interest is not tax deductible.

When considering super funds look at the costs, investment options, performance over the past five years, insurance available and other services offered. You should have income protection cover. Subject to your risk tolerance, at age 36 you can boost the superannuation returns over the long term by selecting a less conservative investment option.

Reality check: So far, so good. Pick a low-cost industry fund and choose a growth option.

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