Sacrifice for a secure future

AUSTRALIANS are a laid-back bunch but when it comes to planning for retirement, a "she'll be right" approach is just not going to cut it. Experts fret that even the 9 per cent of our salaries that automatically goes into superannuation won't be enough to provide us the quality of life in retirement that we expect. Add into the mix asset values that seem to be going down as much as up, and what you need is a plan to supercharge your super.

Getting a grip on your investment strategy and making sure your asset allocation is right is crucial, sure. But really there's only one way to guarantee you'll have more in the bank come retirement: salary sacrificing into super.

Unconvinced? Let's have a look at four reasons why you should delay consumption today for a happier tomorrow.

Enough is enough

There is some conjecture about how much you need to retire in comfort but the consensus is that, for most of us, we'll need to contribute more than 9 per cent. The government intends to gradually ratchet up the super contribution guarantee rate to 12 per cent by 2020, which will begin to bridge some of the gap, but really you need to be more proactive.

The super industry body, the Association of Superannuation Funds of Australia, estimates that a single person needs an annual income of a little more than $40,000 in retirement in order to be comfortable. How "comfortable" you believe that kind of income to be depends on where you live and how you are accustomed to living, but we can probably agree it's not luxurious.

Let's take a look at a fictitious 40-year-old individual earning $80,000 a year with $100,000 already in super - our Jane Dough. We asked financial planning consultancy Strategy Steps to put together some modelling for us. The bad news for Jane is that just contributing the minimum 9 per cent will only generate an annual income of $35,573 (in today's dollars) if she wants to retire by 60. And that figure is assuming a little help from the age pension. Her own money will be all gone by age 90, at which stage she'll have to survive on the $19,469 age pension. This is shown in the chart "Jane needs more dough" (right).

But if she starts salary sacrificing 5 per cent extra now, she'll increase her after-retirement annual income by a full 14 per cent and reach the $40,000 annual income for a comfortable (but, again, hardly luxurious) living in retirement. That said, Jane will still need to lean on the government, and her own savings will be once again wiped out by age 90. She probably needs to contribute more.

Give me shelter

You might say, "what if instead of putting that extra 5 per cent into my retirement fund I invested it outside the super system?"

There are valid reasons for keeping a nest egg outside super but there is one big argument against: tax. Your money gets preferential treatment inside the shelter of the super system.

Again, we asked Strategy Steps to crunch some numbers for us, comparing putting that extra 5 per cent of your salary into super via a pretax salary sacrifice against making a similar investment outside the system. We can't capture every nuance but the results of our stylised results for our friend Jane Dough give you a clear picture of the benefits of salary sacrificing: she'll have 10 per cent more by the age of 60, as you can see from the chart "Working the system" (top right).

Average is best

Markets of late have experienced more ups and downs than a jumping castle at a children's party. And with so many "X-factors" at play globally, we're probably in for more of the same in the coming year or even years.

Unsure of whether now is the time to jump back in? Join the club. Picking the bottom of the market is the Holy Grail of investing, and about as attainable.

In these kind of conditions, the time-honoured practice of "dollar-cost averaging" can help. Basically it means making regular small investments over time, rather than trying to pick the right moment to make one big bet.

It works because you are steadily dipping into the market, buying sometimes higher, sometimes lower. The result is you smooth out the price of the shares you buy and reduce the risk involved with trying to time the market.

It works like this. Imagine you have $500 you want to invest in a stock and you plan to buy $100 worth of the shares a month for five months. The shares start at $10 and then, over the five months, fall to $7.50, then to $5.50, before rebounding to $11 and then settling back at $10. In a choppy market, the shares end up worth the same as they were at the beginning. With dollar-cost averaging you end up with $606 at the end of the five months, against $500 if you'd invested the whole lot at the beginning.

But - and this is why dollar-cost averaging is not an ideal strategy during bull markets - in a steadily rising market you would have ended up with less, or $592.

Forced discipline

Let's face it, you may intend to squirrel some of your money away to build up a nest egg outside super but, to paraphrase, the road to penury is paved with good intentions.

Salary sacrificing inflicts some discipline on your budget. The money is whipped out before it hits your bank account to merrily accumulate in the years to retirement.

It's not called "sacrificing" for nothing. You will have to forgo consumption now for more later, and that is why you need to set up a system to overcome the urge to chase gratification today at the expense of gratification tomorrow.