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Superannuation: Tips for young lawyers

Every Issue

Cite as: April 2015 89 (4) LIJ, p.80

It pays to think ahead - when your pay check stops because you have retired, how will you replace it?

Figuring out how much you need for your retirement is not a simple calculation. It depends on a range of factors such as your anticipated lifestyle, personal circumstances, whether you retire with debt and what medical costs may be required.

According to ASIC’s Moneysmart retirement planner, a home-owner couple retiring today at age 65 and living to 86, needs around $570,000 in superannuation (and other savings) to generate the current ASFA “comfortable” living annual income of approximately $58,000. A single person would require a lump sum of around $480,000.

Key issues 20-30 years old

Many young people don’t see super as a priority. The potential sting in the tail is that when you’re older it may be too late to boost your super. Here are some tips to increase your financial comfort in later years.

Consolidate your super

On average Australians have balances with three or more super funds. Consolidating your super can reduce fees and make it easier to manage. The Australian Taxation Office’s SuperSeeker website can help.

It’s worth having a look. You could be one of the six million lost and ATO-held accounts with a total value of just under $17 billion.

Tip: If you move address let your super fund know; failing to do so is the single biggest reason why super gets lost.

Extra contributions early

One of the most significant factors in how much you save is time. The longer you are invested in the market, the more your savings will grow. This is referred to as compound interest. For example, investing $2000 a year for 35 years is likely to result in higher savings than investing $5000 a year for 20 years. And the key reason is the positive effect of compound interest.

There are limits on the amount of contributions you can pay into super. Since 1 July 2014, individuals up to age 50 can contribute up to $30,000 of concessional contributions (being superannuation guarantee, salary sacrifice and/or personal tax deductible contributions). For people over 50, the limit is $35,000.

Tip: When you get a pay rise, increase your super savings. For example, if you get a 3 per cent pay rise, take 2 per cent as extra salary and increase your super contributions by 1 per cent.

Key issues 30-40 years old

For many this is the decade when people buy their first home, get married and/or have kids, so putting more money into super may seem like a big ask. It’s quite likely that you will now have debts, such as a mortgage, and your lifestyle depends on a stable income.

Once again, even small additional amounts paid into super can make a big difference over the longer term.

You’re also young enough to invest your super into more growth oriented investments (e.g. shares or property) that have offered a higher return over the longer term, albeit that they may experience short-term periods of higher volatility. If you retire at age 65, you are still likely to have at least 20 years to ride out these short-term periods of volatility.

Home loan v super

Australians do have a love affair with real estate and home ownership is high compared to many other countries. While owning our own home is a priority for many of us, there are significant tax concessions afforded to super making it one of the most effective ways to build wealth for retirement. Super also helps you spread your savings across a more diverse range of asset classes.

Tip: While purchasing and paying off your home is certainly an important objective, it is equally important to plan and prepare for retirement life by building wealth outside the family home.

Insurance and beneficiaries

Most people would not ever forget to insure their cars and home and contents, but many forget about insuring their family’s financial security from not being able to work due to illness, injury or even death.

You should consider whether your insurance is sufficient for your needs. If your circumstances change (e.g. new dependants or more debt) it might be worth thinking about whether you should increase your insurance. Your annual super statement will tell you whether you have insurance.

Tip: Have you made a beneficiary nomination for your super account? You are able to advise your super fund of the beneficiary(ies) to whom you want your super and any insurance paid on death.

The right investment option

Making an investment choice that best meets your needs starts with awareness and engagement. However, on average around 80 per cent of Australians are invested in a default investment option. The default investment option is where your super is invested if you have not made your own choice. It is an investment option designed by your super fund to be suitable for most members. Most default investment options are based on a “balanced” asset allocation. SuperRatings categorises a “balanced” investment option as one that has between 60 per cent and 76 per cent in growth assets (i.e. shares and property) and between 24 per cent and 40 per cent in defensive assets (i.e. cash and fixed interest).

Generally, growth assets are expected to outperform defensive assets over the long-term, however their return will also be subject to higher variability or volatility.

Tip: Be aware of the investment options your super fund provides. Remember that you are likely to be working for about 40 years, with perhaps a similar period of time in retirement. Therefore the way your super is invested will very significantly influence how much your super grows.

Salary sacrifice

Depending on your circumstances, saving through super can be more tax effective than saving outside super. Contributing from your gross (pre-tax) salary or “salary-sacrificing” can be an easy and tax effective way to accumulate retirement wealth.

You pay income tax only on income you actually receive, so you do not pay income tax on income that you decide to salary sacrifice into super. For example every dollar you earn between $37,001 and $80,000 is taxed at 32.5 per cent However, every dollar in the same income range salary sacrificed into your super account is taxed at just 15 per cent. That means every $100 in gross income equates to $67.50 in your pocket or $85 in super.

If you decide to increase your contributions, check that you do not exceed the superannuation contribution cap.

Tip: in the $100 example above, the $85 invested in super is 24 per cent higher than the $67.50 that instead would have been paid into the person’s pocket. So when considering whether to start salary sacrifice contributions, remember there are not too many investments earning an automatic 24 per cent return.

ANDREW PROEBSTL is chief executive of legalsuper, the industry super fund for Australia’s legal community.


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