HOW TO MAXIMISE YOUR SUPERANNUATION CONTRIBUTIONS BEFORE RETIREMENT
By making small sacrifices over the course of your career, these contributions will compound and aid in not only safeguarding against inflation, but also give you a nice nest egg to enjoy or bring forward retirement.
As you will find when it comes to any long-term savings project, the earlier you can begin contributing to your super, the more it will be able to grow over time. Consequently, it is a good idea to begin making contributions—or investing in some other retirement savings vehicle—as soon as you can.
Even if you are late to the savings game, there are still plenty of things you can do to accumulate what you need to retire. In this article, we will discuss five ways you can maximise your superannuation contributions before retirement.
1. BE WILLING TO MAKE SACRIFICES IN THE PRESENT
While it is a requirement for your employer to contribute 9.5% of your taxable income to your super each year, this is often just the beginning of what you are able to contribute to super. If you can afford it, it will be in your best interest to exercise a “salary sacrifice” arrangement and contribute additional funds of your own.
Because these additional commitments can be tax deductible, the amount of money you are setting aside until later will be notably less in practice, than it appears on paper.
Though making sacrifices in the present may not be feasible for all in, this is generally the most productive thing to do.
2. TRACK DOWN AND COMBINE ACCOUNTS
Currently, there are roughly 15.6 million Australians involved in the superannuation system. Of this population, roughly 7 million (or about 40 percent) have multiple accounts that are actively open. Despite the government taking actions to discourage duplicate accounts, these accounts have been costing the public at large nearly $3 billion per year (due to fees). Fortunately, this issue can be easily remedied.
By tracking down and combining accounts, you can increase the rate your super grows each year (due to the compounding effect of additional funds and less fees). Just be sure to check that no benefits (insurance or otherwise) are lost by transferring to your chosen fund.
3. USE AS MANY TAX DEDUCTIONS AS YOU CAN
If your spouse makes less than $37,000 per year, any contributions you make to their super can be deducted from you own tax obligations. Other common deductions include the ability to contribute directly from your bank account to your fund and claim a tax deduction. This allows you to ensure you are maximising the $25,000 every financial year.
4. TAKE ADVANTAGE OF THE CATCH-UP CONCESSIONAL CONTRIBUTIONS RULE
Though the government has preserved the non-concessional contribution cap of $100,000, it has also introduced a “catch up” concessional contributions. This makes it possible for many individuals to grow their super by utilising unused concessional contribution caps within the next 5 years. For example, with a concessional contribution cap of $25,000, lets say in the 18/19 financial year you only contribute $15,000 between yourself and your employer. In the 19/20 year you have an additional $10,000 you can contribute concessionally in the financial year, taking your cap to $35,000 for the 19/20 financial year.
The catch up allowance applies to individuals with less than $500,000 in their superannuation balance at the beginning of the financial year. Because this rule may change in the future. Therefore, those who are able, should take advantage of it.
5. CONSIDER MOVING AWAY FROM THE BANKS AND INDUSTRY FUNDS
While it is tempting to believe that higher returns are always better, one thing the superannuation industry has been quite poor at is sticking to risk profiles.
It has been observed that some industry funds invest in things that their members may not feel comfortable with. An example could be a supposedly ‘balanced’ superannuation fund, but they invest over 90% of their assets into ‘growth’ assets. This is very misleading for the average person.
The general rule is that for balanced funds, 60% should be allocated to growth investments and 40% be invested in defensive assets. This means that you can spread your risk in case of a market downturn in some of the growth asset markets. We wish that all industry super funds would follow these principles.
At Financial Framework, we have a very strict process around transparency – we make sure our clients know about everything they own and invest in and risk profiles – we stick to strict risk profiles, so if you are adverse to risk or want to know your allocation won’t stray to beyond your tolerance, you can easily know you’re in the right fund. We also want to make sure that performance and the balance of the fund correlate to your needs long term. Why take unnecessary risks, if you can achieve your goals without it.
Additionally, if you trust your own financial prowess and are willing to take a few risks, you may want to consider looking into a self-managed superannuation fund.
Though you cannot withdraw from your super before retirement, having the flexibility to change funds makes it easier to find a solution that works for you.
CONCLUSION
These days, saving for retirement is incredibly important. If your super is not performing as you hoped it would, you may need to make a few sacrifices. Though there is no “magic button” that will grant you wealth overnight, there are still quite a few productive changes you can possibly make.
It is very important that you understand that the information above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. It is also worth noting that the Australian financial and taxation system is ever changing, and the information above may no longer be relevant. Again, we suggest seeking professional advice from a financial adviser before proceeding.
