A recent survey of SMSFs revealed that estate planning is the highest unmet need for advice, estimated to affect 59,000 funds which equates to about 10% of the total number of SMSFs in Australia. Given demographic trends and the continued growth of SMSF numbers in Australia, this advice gap looks set to rise over time.
There are many good reasons to obtain advice on your SMSF’s estate arrangements, whether you need to plan carefully to cater for a blended family structure, to determine who is eligible to receive your SMSF death benefit, or simply ensure that the most tax effective outcome can be achieved for your beneficiaries.
Whatever the need is, it is imperative to ensure that the SMSF’s estate planning arrangements dovetail with each member’s other (non-superannuation) estate arrangements in order to achieve the right overall outcomes. Featuring prominently among these are the Will and Powers of Attorney, but there are also life insurance policies and entities such as discretionary trusts to consider.
How much superannuation should I have for my age?
As of July 2014, employers have been required to contribute 9.5% into superannuation, however individuals are able to contribute further.
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.
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.
The longer a person has secured super contributions and associated investment earnings, the higher their account balance, especially over a significant period of time.
So, for my age, how much super should I have?
For the competitive among us,
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,
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 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;
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.
When planning for retirement, it’s important to understand your SMSF household needs, and outline your goals with your adviser.
The latest report on the financial health of SMSF trustees heading into retirement has found that the amount needed for a 65-year-old couple to afford a comfortable retirement has risen by 17 percent from $702,000 in the previous year to $824,000.
Unfortunately, this report has also found that one in four are unlikely to achieve their SMSF goals.
Realistic wealth goals for SMSF trustees
Of course, achieving your ideal lifestyle is easier if you start with more wealth. The direct link is the greater level of initial wealth, the higher chance an SMSF household will be able to live their desired lifestyle in retirement.
The last seven years has seen a rising trend of median SMSF balances, but recent weak investment markets have resulted in low returns, and only a small increase. This brings the median balance for two member SMSFs to $1,137,000 with the median imputed investment return of 1.0 percent,
According to Australian Bureau of Statistics (ABS) figures, goods and services spending grew by 21 per cent in 2015-16 over the 2009-10 figure for households with a reference person between 55-64. In the same period, households headed by someone over 65 years of age saw a spending increase of 22 per cent.
So, what are they spending their money on?
The below infographic demonstrates some interesting findings from the ABS data as summarised by nestegg.com.au.
Money know-how can come from anyone, young or old. When it comes to financial wisdom, author and speaker Kylie Travers has taken her lead from the previous generation.
Get serious about saving
You can’t avoid it. To get on top of your finances you need to save and to save means you have to have financial discipline. Kylie was taught by her parents and grandparents that if you want to look forward to a better financial future, you need to take a serious approach to saving.
“My parents raised me to save money, set big goals, work hard and think about the future,” says Kylie. “They were both very open about money and my Dad gave me a copy of “The Richest Man in Babylon” by George S. Clason to read when I was just 12. So I learnt early about what you could do with money if you were prepared to save. My parents invested in shares and property and that helped me realise how much more freedom you have with other sources of income,
Scott Morrison has delivered his second Budget, aimed at boosting growth and the government’s flagging poll rating, declaring there are “better days ahead”. Here is a a quick recap of some of the key announcements that affect the individual.
To find out more, read our “Government delivers stability in 2017-18 Federal Budget” post or contact the team here at Superfund Partners.