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Sally and John Smith are a hard-working baby boomer couple in their late 50’s. For many years their priority was their family, in particular paying off the family home. Now that they own their home and their kids are starting their own families, Sally and John are thinking about retirement. They don’t want much – just to be able to spend quality time with their grandkids, go on holiday every couple of years and, have the ability to continue to do all the social things they currently do.

They know they can’t maintain their lifestyle on the aged pension alone, and with relatively small super balances, the big question for them is when can they afford to retire?

Starting late in life

Unfortunately many baby boomers generally only started accumulating super when 3% compulsory super was introduced in 1992. Before then superannuation was optional and had to be funded by the individual. With mortgages and alarmingly high interest rates, it’s not surprising that many people put any extra savings into their homes rather than their super.

And despite the increase in the super guarantee to 9% in 2002, many still didn’t contribute any extra to their super. This means that many baby boomers are unlikely to have enough in super now to fund the lifestyle they’ve become accustomed to when they reach retirement.

How much is enough?

It’s generally accepted that you’ll need 65% of your pre-retirement income in retirement. Of course you may need more or less depending on your personal circumstances.

To help you determine how much you’ll need in retirement you should prepare a budget that takes into account your desired lifestyle, goals, objectives and life expectancy. If you want to be able to travel overseas every couple of years, you’ll probably need more money in retirement than someone who is happy to caravan around Australia for a couple of months a year.

Another good source of information to help you determine how much you’ll need in retirement is the Westpac/ASFA Retirement Standard which looks at the spending habits of current retirees. This will give you an estimate of the annual budget needed to fund either a comfortable or modest lifestyle in retirement.

The most recent Retirement Standard shows that, in general, a couple looking to achieve a comfortable retirement needs to spend $54,562 a year, while those seeking a modest (think better than the Age Pension but still only able to afford fairly basic activities) retirement lifestyle need to spend $31,263 a year.

We now know that investing a little time and money into super can pay dividends when you finally retire. But all is not lost if you haven’t been able to do this. Contributing to your super in the few years leading up to retirement can still have a beneficial effect on your account balance when you retire.

It’s never too late to boost your super savings.

It might be a cliché but in this case it’s very true – it’s never too late to top up your super.

Make extra contributions – every little helps: Super fund members can make contributions to their super from before and after-tax money, however the government limits the amount of contributions you can make in any given year.

Before-tax contributions are called concessional contributions. These contributions are made with before-tax money (think employer super guarantee contributions and salary sacrifice contributions) and are taxed in your fund at 15% instead of your marginal tax rate. The cap on concessional contributions is currently $25,000 a year.  However if you are aged 50 years or over, an increased concessional contributions cap of $50,000 applies until 30 June 2012.

The government has also announced changes to the concessional contributions cap to help older Australians increase their retirement savings. If passed by parliament, the concessional contributions cap will permanently remain at $50,000 for individuals aged 50 years or over with super balances below $500,000.
 
After-tax contributions are called non-concessional contributions. Because you have already paid tax on these contributions, they are not taxed when they are put into, or taken out of your super account.

The current non-concessional contributions cap is $150,000. However if you are aged under 65 years old, you may be able to make non-concessional contributions of up to three times the cap over a three-year period. This is known as the 'bring-forward' option. The bring-forward cap is three times the non-concessional contributions cap of the first year. So if you brought forward your contributions in 11-12, it would be $450,000 (3 x $150,000).

Top up your spouse’s super - If your spouse earns more than you do, they can help boost your account balance by splitting certain super contributions with you. The ATO limits the types of contributions and the amount you can split with your spouse so check their website for the current thresholds. www.ato.gov.au/super  

If you or your spouse earns less than $13,800 a year, and you make contributions to their super account, you may be able to claim an 18% tax offset on contributions up to $3,000.

Take advantage of a government co-contributions - As an incentive to get people thinking about their super, the government will dollar match all after-tax contributions you make to your super fund up to a maximum of $1,000. So if you earn less than $61,920 a year you could be eligible to receive up to $1,000 in super contributions from the Government. The amount of the co-contribution you receive will depend on your income and the amount you have paid as a personal contribution to your super fund. 

Transition to retirement (TTR) - A transition to retirement strategy is a great option if you want to cut down the hours you work without sacrificing your salary. A transition to retirement income stream allows you to access your super while you’re still working as long as you've reached your preservation age.

To start a TTR income stream you must first roll the money in your super account into a TTR income stream. Once you've done that, you can start receiving regular payments from your super.

This means that you can reduce the hours you work without sacrificing your lifestyle since your salary is supplemented by regular payments from your income stream.

Alternatively, you can continue to work full-time and use the additional income to enjoy life's luxuries. Or you could reap the tax benefits of salary sacrificing more of your wage into super (effectively paying the 15% contributions tax rather than your tax-rate) and continue to build your retirement nest egg.

Seek professional help - As with most things in life, it pays to speak to a professional. An independent financial planner will sit down with you, help you define your retirement goals and provide you with strategies to help you reach those goals.

Through our association with Industry Fund Financial Planning*, Prime Super members have access to professional and commission-free financial planning.  The first consultation is at no charge and you will be provided with the costs of preparing your financial plan up front. You can then choose whether or not you proceed. Contact your Regional Manager or our customer service centre and we can refer you to our planner.

More information?

Westpac/ASFA Retirement Standard - http://www.superannuation.asn.au/RS/default.aspx

*Industry Fund Financial Planning (IFFP) is a division of Industry Fund Services Pty Ltd (ABN 54 007 016 195 / AFSL No 232514)