Many people could receive a shock when they retire when they find out they don't have enough super to support the retirement lifestyle they had envisaged.
Various studies suggest the average person will need more than $1 million in super when they retire to maintain the lifestyle they desire. When you consider that your super may have to support you for 30 years or more, it's easy to see why you might need such a large sum.
Most people aren't likely to achieve that and could be forced to rely on the aged pension to top up their income. If you don't want that to be you, now might be a good idea to consider a number of strategies to boost your super.
Here's my take on five relatively simple steps most of us can take…
- Salary sacrifice
Many employers allow people to make pre-tax contributions to their superannuation – called salary sacrifice. This means your additional contributions are paid in pre-tax dollars and not taxed at your top marginal tax rate. Contributions to super are taxed at 15% – lower than most personal tax rates.
- Find your lost super and consolidate your accounts
At the end of June 2015, over 14 million Australians had a super account and around 45% have more than one account.
Australian Tax Office (ATO) data also shows that there is more than $16 billion in lost super held in more than 6 million accounts. Most of that is because the account owners are uncontactable or the accounts have become inactive – most likely because the owner has forgotten about them.
It's easy enough to locate your super using the ATO SuperSeeker tool.
Once you've located your lost super, consider rolling it all into one super fund account. You'll likely pay less fees, will have a higher balance – and you only have to do it once. Keep track of your super going forward and if you have the ability, nominate that super fund as your preferred one if and when you change jobs or companies.
- Spouse contributions
If your partner earns less than you, consider making additional contributions to their super. According to the ATO, you could also be eligible for an 18% tax offset on contributions up to $3,000 if your spouse's assessable income and employer super contributions total less than $13,800 a year.
- Concessional and co-contributions
If you are 49 or over, you can contribute up to $35,000 a year at the concessional tax rate of 15% for a limited time. Under 49 and the maximum most people can contribute is just $30,000. You can still contribute more than this from your after-tax income, although there are caps and you won't receive the benefit of the concessional tax rate. Just be very careful about going over these caps, as contributions above them can be assessed at your marginal tax rate.
If you are a low-income earner and make after-tax contributions to your super, the government will make a co-contribution as well. You don't have to apply either – if you're eligible, the government will pay it automatically.
- Fees
The amount of fees you pay your financial advisor and fund manager can make a huge difference to your final super balance, so make sure you check the fees you are being charged.
If you are in a retail fund – usually run by one of the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), or AMP Limited (ASX: AMP) – consider a move to an industry fund, which generally has much lower fees.
Bonus tip – Take control of your own future
If you have enough funds in super, you could consider setting up an SMSF, which allows you to have direct control over your investments – effectively you become the fund manager. The advantages are that if you are prepared to do a lot of the administration work yourself, you could reduce your total annual costs to less than $1,000.
Foolish takeaway
You owe it to your future self not to leave it too late before you start preparing for your retirement. The earlier you start, the better off you will be once you retire, and it's more likely that you'll be able to update your car, take regular holidays and live the lifestyle you dreamed of.
