Superannuation

[Die Krugers]

Hi Everyone

My husband and I am 30 years old, so we/he will be working for about another 25 years in OZ. Is the 9% super enough to cover us when retired? How does it work? Say you earn $80 000 per year (in today's terms) by the time you retire at 55, do you get a certain percentage of your salary, or how does it work? At that stage I am sure that you would have paid off your house or would be close to it, so you would probably not need as much as when you were young with a house and car to pay off, although things like medical expenses increase, etc.

I just want to find out if we should think of paying more than 9% into Super, if it will be possible.

Thanks so much!

Tania

[Mara]

Hi Tania1000

I doubt whether the 9% on $80,000 will be enough to keep you in the manner you were used to, even if your house is paid up.

You can salary sacrifice to your super, which means, they deduct an amount from your salary that you nominate, to pay into your super on your behalf, after they have deducted it, only then do they calculate your tax. Also, the amount that you sacrifice to your super is only taxed at 15%, which will be a big difference.

I know of somebody that paid off their house in ten years, at that time they took the amount of the payment that they had been paying on their house and paid it into their super instead.

[woodag]

Say you earn $80 000 per year (in today's terms) by the time you retire at 55, do you get a certain percentage of your salary, or how does it work?

Way back some larger Aussie companies used to run "defined benefit" superannuation schemes, where your retirement income could be a percentage of your final salary and depending on your years of service. Super schemes like that are very rare now (or are closed to new members), and almost certainly you will be in an "accumulation fund" (or "defined contribution fund").

With those your retirement income is going to depend on how much you and your employer have contributed, and of course, the earnings over the years. When you retire you can use the accumulated funds to buy an annuity, but most people opt for what are now called "account based income streams" where, simply put, your funds are invested and you draw out payments of a certain percent each year (at 55 years of age, that percentage might be 5% or 6% but could be more if you are older).

You can make an estimate yourself, but there there are plenty of Aussie super funds and banks etc that have online calculators that you can use. Here is one that I just found, but there are lots of them out there:

http://www.asic.gov.au/fido/fido.nsf/byhea...or?openDocument

However you work it out, there is going to be guesswork involved. In particular, the estimate of the future earnings rate in the super fund will make a huge difference to the outcome (this is due to what some people call the miracle of compound interest, over 25 years or more). You will probably find that Mara is correct, and the 9% employer contribution alone may not be enough. Just remember that an extra $1000 contributed when you are 30 years of age will be more beneficial than am extra $1000 contributed when you are close to retirement.

[Dax]

I would sugest that you co-contribute 6% - 8% yourself, or like woodag and mara suggested opt for salary sacrifice.

The bottomline is that whatever your employer pays towards your super, it won't be enough, you'll have to make an extra provision.

At the moment if you don't have enough, in time you may fall back on the old age pension, but there are rules there, and no one knows how the rules may change in the future.

Luckiliy you are still young, and you have about 25 - 30 years to build something up. Also, I suspect the choice of retirement at 55 may also change in the medium future. It won't affect me, as I will HAVE to slog on until 65, and that would have been my retirement age in RSA in any case.

Play around with the calculators that super firms provide and decide what will suit you the best.

Be careful of one future scenario: People live longer nowadays, if you retire at 55 and while you are still at relative good health at 80, and your funds run out, and then you have to jump through th eold age pension hoops, it can be a bit daunting.

Cheers,

Dax

[Bob]

If you are thirty-something, then you will have to work until 60 . . . . not 55.

Anyone born after 1960, cannot retire at 55. they have to keep in the workforce until they turn 60.

That is 30 years away.

When you get to 60, the laws will invariably have changed to extend the retirement age even older!

Already, the government is "floating" the idea of paying the Old Age Pension at 67 instead of 65.

They talk about the idea for a couple of years to "soften up" the public, then start to seriously bring in the legislation to implement the change, so by the time you are in your 60s the retirement age will have gone up.

It's good that you are taking an active approach to your retirement.

I've been retired now for almost 18 months. I'm 56 and haven't worked a day since I quit my job of almost 28 years with the Australian gov't in the Post Office.

I read an article in a magazine back in 1981 showing how the ageing population wouldn't have enough people in the workforce to generate the wealth needed to sustain every old age pensioner to a comfort they would like.

That was what got me into paying into my Government Pension Scheme, and now I'm reaping the benefit of it, travelling around Australia for months on end with a regular income stream coming in for the rest of my life to keep my head above water.

Just pay what you can out of your pay packet into your Super, but make it at least $1 000 each a year (after you've paid income tax on the $1 000), because the Australian gov't will also top your contributions up (if you earn under $58 000 a year)

Also, save your Super in an "Industry" Super Fund . . . . they pay consistently better returns each year to their members, which means a fatter pay-out when it's time to pension yourself off and put yourself out to graze for the rest of your life!

Think about it . . . . just a couple of simple things to give yourself that little bit extra later on in life!

[Guest Bronwyn]

Hi Tania

The Australian Super system is quite complicated, and underwent some radical changes in June 2007.

A lot of financial planners and accountants are still trying to get their heads around the changes, and Financial Planning is a huge industry here. Basically, the Government is trying to encourage people to save more for their retirements and rely less on the Government to provide for them in old age. To do this they have provided a few tax incentives.

The general rule of thumb when saving for Super is:-

"As a rough rule, the super industry says you'll need an income about 60 per cent of your pre-retirement income to maintain your lifestyle. A rule of thumb often used by IPAC Securities is that you'll need savings of 17 times your desired income if you retire at 55, 15 times if you're planning retirement at 60, and 13 times if you plan to retire at 65."

I took this out of an article called 'A dummy's guide to Super', published in the Sydney Morning Herald in September, meaning it is up to date. You can read the whole article here:-

http://www.smh.com.au/news/superannuation/...607.html?page=3

So, what they are saying is that if you currently clear, say $100k per annum as a couple (I am rounding off for convenience )you will only need $60k per annum to live on in retirement (60%). To achieve that type of income you would need:-

17 x $60k = $1,020,000 saved by retirement age 55, or

15 x $60k = $900,000 saved by retrement age 60, or

13 x $60k = $780,000 saved by retirement age 65

I am not a qualified financial planner, and cannot give personal advice. Most banks and accounting firms can refer you to a planner, and there is a lot of information available in the media too.

Hope it helps, Bronwyn

Edited October 13, 2007 by Bronwyn

[Die Krugers]

Thanks so much for the replies and valuable advice.

I appreciate it!

Tania