Maximise your super contributions

JOANNA McCREERY

Imelda and Stephen, with your home loan paid down to just $21,000 and being within 10 years of retirement, it is a great time to review how you are saving for your retirement.

Repaying your home loan is typically a good, safe strategy, so you should definitely keep doing this, but don’t make it your only savings strategy. At your current rate of repayment, $2000 a month, you will have the loan paid off within a year. If you reduce this to $1000pm it will take almost two years, but the interest cost in lengthening the loan in this way would be less than $1000.

This change leaves you with potentially $2800 a month of after-tax salary you can use to save for your retirement. With $103,000 in super, now is definitely the time to start focusing on boosting this balance. If you want an income in retirement between you of $50,000pa, you will need a combined balance of at least $1 million based on different assumptions to ASFA. If you both plan to keep working over the next nine years (until Imelda is 65), this goal is realistic. You’ll both need to have a plan and stick to it.

The starting point of your retirement savings plan should be saving through salary sacrifice, due to the tax advantages it offers. If you can each maximise your salary sacrifice – let’s assume $1400 a month for Imelda and $1550 a month for Stephen ($2950 a month total) – your combined after-tax salaries fall by only $2000 a month and you will be boosting your super by $2500 a month ($2950 less 15% super contributions tax) after tax between you.

This strategy saves you $6700pa in tax. Better yet, you could have over $1million saved by the time you are 65. We assume you earn 6%pa after tax and fees on your super and that both your salaries rise 3%pa over the next nine years.

A word of caution on contribution caps. With the current $25,000 cap on concessional contributions (which includes salary sacrifice, employer contributions and some employer-paid insurance premiums), you should check that this strategy does not put you over the limit. Penalty tax on contributions made over the limit could apply.

Imelda, as you are over your preservation age, you also have the option of starting a transition to retirement income stream. This ability gives you the security that you can access up to 10% of your super balance each year if you need to. However, it will depend on the components of your super as to whether it is really worth doing this yet. A transition to retirement income stream does offer the benefit of being a tax-free investment environment, but it will also potentially give you additional taxable income. If you already have sufficient income to maximise salary sacrifice, it may be worth waiting until you are approaching 60 before you do so, as income paid after your 60th birthday from a transition to retirement income stream is tax free.

The best way to help Lottie to set herself up financially is to teach her the importance of some simple financial strategies – spend no more than you earn; only have a credit card if you can pay it off in full each month; save some of what you earn each month.

If she wants a car, and you’d like to help, encourage her to save herself and perhaps offer to match her savings.

Joanna McCreery is a director of Majella Wealth Advisers, a Sydney-based boutique financial advice firm. She has 20 years experience in the finance industry. www.majellawealth.com.au

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