Super strategies needed earlier to ensure comfortable retirement: HLB Mann Judd Sydney

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It is imperative that Australians take charge of their superannuation much earlier than they are if they want anything like a ‘comfortable’ retirement, warns Jonathan Philpot of HLB Mann Judd Sydney.

It is imperative that Australians take charge of their superannuation much earlier than they are if they want anything like a ‘comfortable’ retirement, warns Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.

Recent research has once again shown that babyboomers will only have half the superannuation savings they will need for a comfortable retirement when they reach 65.

“Those aged over 45 certainly can’t rely on the super guarantee contributions to achieve a comfortable retirement, even when the rate increases from nine percent to 12 percent by 2020.

“By the time most people start thinking about retirement – perhaps 10 years out from retirement age – it’s usually too late to put in place a suitable plan for building wealth within superannuation,” he said.

Mr Philpot says that HLB Mann Judd estimates that a balance of between $800,000 and $1,100,000 is required for a ‘comfortable’, retirement, depending on whether people are happy to run down their capital or not.

“This would generate an annual income of around $55,000, which is the figure that a ‘comfortable retirement’ is generally based on.

“Until recently, it has been generally accepted that people could top up their retirement savings during their last decade of their working lives to achieve this, but superannuation changes, especially the lowering of contribution caps, makes this unworkable.

“Those currently aged 45 with an average household income of $100,000 and the average household superannuation balance of that age group of $120,000*, who rely on the super guarantee contributions alone, will have just over $662,000 in their superannuation if they retired at age 65.  This would create an income of between $33,000 and $46,000 a year.

“The closer people are to retirement before they start planning, the less likely they are to have enough capital for a comfortable retirement.

“For example, those aged 50, with the average super balance of that age group of $152,000*, will only have approximately $535,000 in savings when they retire at age 65, if they rely on superannuation guarantee contributions alone.  Those aged 55, even if they have an above-average super balance of $300,000 at that age, will have just $610,000 in super savings on retirement.

“It is simply not possible to lift the super balance to a level that will a provide for a comfortable retirement and the only two alternatives that they can control, are to work until they are in their 70s, or save more.

“Even for those aged over 45, the only way to save enough in superannuation to fund a comfortable retirement is to maximise their concessional contributions.

“Those aged 55 or more will still find it difficult to build enough super with the current maximum concessional rates, even if the government sticks by its promise to increase the concessional limit back to $50,000 by 1 July 2014.

“However, those approaching 40 still have the opportunity to build up a sizeable superannuation balance.  They should consider superannuation strategies, in conjunction with paying off their mortgage and building personal wealth,” he said.

Mr Philpot added that techniques used by pre-retirees in the past, such as making a big push into super in the last years of their working lives, are now not possible within super and are unlikely to be as effective outside super.

“Unfortunately the rules regarding super do change quite often and this does not help build confidence in super but relying on more favourable rule changes should not be counted on.

“The only safe solution for maximising super is to start planning earlier,” Mr Philpot said.

1. Expected super balance if relying solely on superannuation guarantee contributions: 

Starting household super balance

Super balance at age 65 if currently aged:

40 years

45 years

50 years

55 years

$50,000

$696, 271

$494,439

$337,223

$215,607

$100,000

$843,823

$614,270

$434,539

$294,640

$150,000

$991,376

$734,100

$531,846

$373,673

$200,000

$1,138,929

$853,931

$629,172

$452,706

$300,000

$1,434,035

$1,093,592

$823,806

$610,771

Assumptions:

Annual household income of $100,000
Annual income grows at two percent per annum
Super Guarantee Rate increases from nine percent to 12 percent by 2020
Annual tax rate is 15 percent
Assumed real rate of return is five percent per annum

2. Expected super balance if maximum concessional contributions are made: 

Starting household super balance

Super balance at age 65 if currently aged:

40 years

45 years

50 years

55 years

$50,000

$1,552,214

$1,065,652

$692,892

$416,483

$100,000

$1,699,767

$1,185,482

$790,208

$495,515

$150,000

$1,847,320

$1,305,313

$887,525

$574,548

$200,000

$1,994,873

$1,425,143

$984,842

$653,581

$300,000

$2,289,978

$1,664,804

$1,179,475

$811,696

Assumptions:

Annual household income of $100,000
Annual income grows at two percent per annum
Maximum concessional super contributions increase by $5,000 every four years
Annual tax rate is 15 percent
Assumed real rate of return is five percent per annum

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.

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* ASFA – Developments in the level and distribution of retirement savings, Ross Clare, September 2011, page 11 of report – www.superannuation.asn.au/policy/reports

For more information please contact:

Jonathan Philpot – Phone: 02 9020 4196

29 August 2012