Mortgage or super? Super or the mortgage? Paying down your mortgage quickly may seem prudent but making additional contributions to superannuation from a young age is even more important now that the concessional contribution limits have been reduced.
Starting earlier will also cost you much less in the long run.
THE REALITY
A large percentage of us - 83 per cent - have superannuation balances of less than $100,000. In the 30- to 34-year-old bracket, that percentage is as high as 93 per cent. In the 45- to 49-year bracket, it's still rather high at 80 per cent, and in the 55- to 59-year bracket, it's 69 per cent, according to ASFA research on superannuation balances in the 2009-2010 financial year.
Those numbers should ring alarm bells, particularly if you're over 55. A superannuation balance of just $100,000 at 55, even if you work for another 10 years on an income of $80,000, will only give you an annual income at retirement of $24,107 until age 91, after which you would have to rely on the pension, which is only marginally lower.
And $100,000 is far from the $500,000 to $1 million bandied about as the magic final balance needed for your superannuation to sustain a reasonable lifestyle into retirement.
WHAT'S REASONABLE?
Our table shows the varying amounts you would need to salary sacrifice at different stages of your life to achieve the ASFA's standard retirement income of $40,391 a year for a single person.
Before you work out if you're anywhere near that goal, consider what a reasonable retirement is. What are you earning now? Would $40,391 keep you in the manner to which you've become accustomed?
Of course, that's tax-free and does assume that you have no accommodation costs, that is, you've paid down your home. It also assumes a weekly communications budget of just $25.51, a clothing budget of $39.10, $105.34 to spend on food and $214.70 on leisure, which would include annual holidays.
THE SOLUTION
An executive financial planner at Westpac, David Simon, says that for younger people, "there's no real desperation and drive to fund retirement because it's in the future".
But, as the figures show, people of all ages should be thinking about their retirement and changes to concessional contribution limits, or the amount that you can contribute tax-free into superannuation, mean it's more important than ever to start thinking about it from a younger age.
It used to be that higher limits allowed you to throw a lot in at the last minute, or after you turned 55, when you finally had a bit of spare cash lying around. However, the reduction of those limits to $25,000 for the majority of people, which includes your 9 per cent superannuation guarantee, means you have to start saving sooner.
"People no longer have the luxury to wait just before retirement ... to channel everything into super," Simon says.
A senior technical services manager at Colonial First State, Craig Day, uses the example of two people aged 30 on annual incomes of $80,000 and with superannuation balances of $50,000. They have the same goals, that is, to retire at 60 with a balance of $1 million.
One of them starts salary sacrificing $9800, indexed at 5 per cent until retirement. The other waits until they are 50 to salary sacrifice, from which point they contribute their maximum concessional limit for 10 years. They also have to contribute an additional $37,000 a year, after tax, to reach their goal.
They both end up with the same amount at retirement but the cost to the early starter is $268,000 of gross income, compared with more than $500,000 for the late starter.
Frequently Asked Questions about this Article…
Should I pay down my mortgage or make extra contributions to superannuation?
The article argues that, especially for younger investors, making additional contributions to superannuation can be more important than rapidly paying down a mortgage. With concessional contribution limits reduced, you no longer have the luxury of topping up super close to retirement, so starting extra contributions earlier generally costs you less in the long run.
How much superannuation do most Australians have and why does it matter?
ASFA research cited in the article shows a large share of Australians have low balances: 83% have less than $100,000, 93% of 30–34 year‑olds, 80% of 45–49 year‑olds and 69% of 55–59 year‑olds. Low balances matter because they can leave you relying on the pension or a much lower retirement income than commonly quoted targets.
What is the ASFA standard retirement income and what assumptions does it make?
The ASFA standard retirement income for a single person quoted in the article is $40,391 a year. That figure is tax‑free and assumes you have no accommodation costs (home paid off), plus modest weekly budgets such as $25.51 for communications, $39.10 for clothing, $105.34 for food and $214.70 for leisure including annual holidays.
How have reduced concessional contribution limits changed retirement saving strategy?
The article notes concessional (tax‑favoured) contribution limits have been cut to $25,000 for most people, which includes employer super guarantee contributions. That reduction means you can’t simply wait until late in your career to cram large sums into super — you need to start saving earlier and use regular salary sacrifice or other strategies to build your balance over time.
What is salary sacrifice and why does starting early help reach a $1 million super goal?
Salary sacrifice is directing pre‑tax pay into superannuation. The article gives an example from Colonial First State: two 30‑year‑olds on $80,000 with $50,000 in super both target $1 million by age 60. The early starter who salary sacrifices $9,800 (indexed at 5% annually) reaches the goal with a gross cost of about $268,000, whereas the late starter who waits until 50 must contribute the concessional maximum for 10 years plus large after‑tax top‑ups, costing more than $500,000.
If I'm 55 with $100,000 in super and still working, what retirement income can I expect?
The article estimates that a $100,000 super balance at 55, even with another 10 years of working on an $80,000 income, would produce around $24,107 a year in retirement until about age 91, after which you would likely need to rely on the pension.
How much more expensive is it to save for retirement if you start late?
Based on the example in the article, delaying meaningful super contributions is substantially more expensive: the early saver paid the equivalent of about $268,000 of gross income to reach the $1 million goal, while the late starter needed in excess of $500,000 in gross income equivalents (including large after‑tax contributions) to reach the same balance.
What practical steps can everyday investors take now to improve their superannuation balance?
The article’s takeaway for everyday investors is to start thinking about retirement earlier: review your super balance, consider regular salary sacrifice contributions where feasible, be aware of the $25,000 concessional cap, and avoid relying on last‑minute large contributions. Starting sooner reduces the total cost of achieving retirement goals.
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