How much superannuation should I have for my age?
As of July 2014, employers have been required to contribute 9.5% into super, however individuals are able to contribute further.
Whilst there is no magic age to start planning for retirement, the simple answer is the earlier you start, the more chance you have to achieve the retirement you dream of. This really comes into play because of the compounding interest effect and how powerful it can be.
According to The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard, a couple expecting a comfortable retirement will need an average of $60,457 a year.
The longer a person has secured super contributions and associated investment earnings, the higher their account balance, especially over a significant period of time.
This is also why young people being illegally paid cash in hand for work should consider the implications of forgoing the superannuation contributions they’re owed, as it can put the size of their retirement nest egg at risk.
Knowing how much you need in retirement is more about knowing what kind of lifestyle you desire when you have retired, or, transitioning to retirement.
According to the ASFA Retirement Standard, for a single person that magic number is $545,000.
But according to the ABS – the average super balances for the entire working population1 would suggest that we are not even close to that mark, however, a closer look into the average balance by age group reveals that the average balance for men between 55-59 is $237,022 and for women it is $123,642.
So how can we boost our super balance?
When every dollar counts, here are a few sneaky ways to squirrel up your super balance;
- Make sure you’ve consolidated all of your super2 so to save on incurring multiple fees across multiple accounts. Just keep a careful eye on any nasty exit fees.
- We nearly all have super guarantee provided by our employer3,
Self-managed super funds have often been criticised for lacking diversification when it comes to their investments, specifically that SMSFs have too much in Australian shares and cash and not enough in international investments.
This criticism is somewhat unwarranted as SMSFs access international investments via Australian managed funds and ETFs. Research from Class Super shows that the underlying exposure to international equities across the top 20 managed funds and ETFs is 57% and 58% respectively (Source: Class SMSF Benchmark Report June 2016).
A large portion of SMSF trustees desire access to international investments, namely the US as the largest financial market in the world, however investing directly has traditionally been a costly and complex exercise. Trustees face a mountain of paperwork, complex forms and typically expensive trading fees.
Looking at trading fees, the cost to an SMSF to purchase AUD $10,000 of US stocks will be anywhere from $41 to $134 ($88 on average) per trade if conducted via the international broking solutions of the big four banks (Nabtrade,
The month of February finished up being almost flat, a surprise after the deep selloff early in the month.
Listed property, (local referred to as A-REIT’s and global as G-REITs) was down again on the rising interest rate curve. Although one never wants to stand in front of a freight train the value now emerging in listed property starts to look interesting at these levels. The longer term outcome will depend on bond yields.
Bonds are in the spotlight as a leading culprit in the increased volatility and the sell-off in the aforementioned A-REITs. The ten year US bond yields that we discussed at length in last months post continued to rise, peaking at 2.94% on 21 February. The yields appear to have run into some resistance at that level, but this could be merely a consolidating pause.
During the month, the S&P 500 index of US shares had a loss of 11.83%, which takes it into the ‘correction’ territory.
In the May 2017 budget, the Government announced that from 1 July 2018, older Australians could contribute up $300,000 each (per couple) from the sale of their family home into their Superannuation Fund. This measure is to encourage older people to downsize from family homes that no longer meet their needs, while also freeing up these homes to younger families starting out.
Do you pass the test to contribute the sale of your home into your Superannuation?
Currently the rules state that if you are over 65 years of age, then you cannot contribute into Superannuation unless you meet the “work test” (meaning you have worked at least 40 hours in a 30-day period and been paid for this service). If you do meet the work test, then you can only contribute up to $100,000 in after-tax contributions, and $25,000 in before-tax contributions.
Another layer of complexity to this is that even if you are over 65 in age,
The month of December capped off a great year for investment markets. Good returns with unusually low volatility provided ‘many happy returns’ for balanced and growth investors.
Australian fixed interest turned in a negative return, as longer term rates rose during the month. A widely expected rise in the US Federal Reserve rates pushed their Fed Funds rate up to 1.5%, the same as the Australian Official Cash Rate. The only negatives for the major asset classes for the month of December were International Shares, and Australian Fixed Interest. In fact, international shares were mostly positive in December, but the 3.0% rise in the Aussie dollar turned those gains into a negative return for the month.
On the currency front, the strong Australian dollar was in fact more about the US dollar which weakened by 10% versus a trade weighted basket of currencies over the 2017 year. This is a perverse outcome very few would have predicted given the US central bank was just about the only major global central bank raising rates during the year.
The downsizer contribution initiative is due to come into effect on the 1 July 2018. Late last year the Government passed its policy which allows super fund members over the age of 65 to sell a main residence and contribute funds into their superannuation accounts without contribution cap and work test issues.
While it may seem quite straight forward, like any government policies, there are a few hoops to jump first. There are three key steps that need to be taken if a member would like to be eligible to make downsizer contributions.
The first step a member needs to take is to confirm that their contributions will be eligible to be contributed to their fund. An eligible downsizer contribution is where:
1. the contribution is made to a complying super fund by a member aged 65 years or older;
2. the amount is equal to all or part of the capital proceeds received from the disposal of an ownership interest in a dwelling that qualifies as a main residence in Australia;
Update: Applications for the Queensland Government Energy Efficient Appliance Rebate are now open. To apply, go to www.qld.gov.au/appliancerebate.
Although purchasing appliances that are more energy efficient can have a higher upfront cost, they can lead to long term saving because of the amount of money you will save on your electricity bill yearly.
Choosing an energy efficient fridge or washing machine can save Queensland households up to $50 a year, and energy efficient air conditioners could save up to $135 per year. $20 million has been committed under the Affordable Energy Plan for rebates on approved energy efficient appliances, in order to assist Queensland households to improve their energy efficiency.
What are the rebates available?
Rebates will apply to purchases on or after 1 January 2018 of the following household appliances:
- $200 for a 4 star energy rated washing machine
- $250 for a 4 star energy rated refrigerator
- $300 for a 4 star energy rated air conditioner.
There is no magic number to start planning but the simple answer is, the earlier you start, the more chance you have to achieve the retirement that you dream of having.
The reason for this is because of the compounding interest effect. Below are some simple graphs showing how powerful this effect can be.
The first graph shows a beginning balance of $25,000 and rate of return of 6%, with no extra payments. Starting at age 25, by age 65 the balance has grown to over $257,000. If you delay the start by 10 years, the end balance is $143,500.
If you wanted to have $1 million at retirement age 65, the graph below shows how much you would have to save every month, using a 6% return, at different starting ages.
The table shows the amount that would have been personally contributed over the time to retirement and the compounded interest amount.
The S&P/ASX200 Accumulation has now put in two solid months, following the October gain of 4.01% with another 1.64% in November. Twelve month returns are 14.61% almost double our expected annual 12 month returns of around 8.5%. This surge may have pulled forward some of the next twelve months expected gains.
Global markets also posted a good month, with gains of 3.24% and three month gains now at 11.33%. Emerging Markets, which we have favoured in our Managed Portfolios, are up 29.27% over the last year. We mentioned in the last update that Emerging Markets remain somewhat cheaper than developed markets, with arguably more to gain from structural reforms and demographic changes.
Real Estate Trusts
The A-REIT sector (real-estate trusts) saw gains of 5.29% for the month of November. This sector is coming back into favour after a sell-off based on concerns about higher bond rates and the arrival of Amazon which may (or may not) further hollow out the Australian retail sector.