If the big six zero is looming and your super fund is looking seriously depleted, don’t panic. Even three to five years out from retirement there are still things you can do to boost your super.
There’s no doubt that when it comes to super the early bird gets the worm due to the compound interest factor. However even at the 11th hour a few strategic changes can make a difference to a lacklustre super pot. We asked five financial experts for their advice on what to do to play retirement catch up.
AMP financial planner, Andrew Heaven of Wealth Partners Financial Solutions says before examining strategies identify your cash flow and determine your shortfall. “There’s no point sticking your finger in the air and saying if I retire tomorrow I’ll need $40,000 per annum when your living expenses are currently $60,000,” says Heaven.
There’s a host of interactive retirement tools on the internet. AMP’s ‘My Retirement’ simulator will give you an estimate of the shortfall between your existing super balance and how much you’ll need in retirement.
According to the experts, tips for boosting your retirement savings include reducing debt and minimising tax by shovelling more funds into super.
The general consensus among experts is to pay off non-deductible debt such as a mortgage as quickly as possible either by budgeting or working longer.
Mike Hawkins, chief investment officer, Evans & Partners suggests paying off the mortgage and then using your home as security to borrow for investment purposes. A genuine seven-year plus horizon and the ability to borrow $200,000 could be very fruitful, he says.
He recommends steadily investing $120,000 into well-structured equity investments and putting the balance into fixed interest/hybrid type investments that distribute a healthy yield. “You could easily get that portfolio earning 7-8 per cent and given where valuations are at the moment the income that would come off the investment portfolio would service the interest bill plus you’d get a tax benefit,” says Hawkins.
Heaven swims against the tide arguing that the most effective strategy isn’t necessarily reducing debt. He argues that paying off your mortgage with after-tax money mightn’t be all that smart, especially compared to boosting your retirement savings using pre-tax dollars via salary sacrificing.
Heaven advocates converting the debt to interest only (so your minimum repayment is lower) and covering the interest payment with income drawn from a transition-to-retirement allocated pension while salary sacrificing into super. “That way you’ll reduce the amount of tax you pay and at a time in the future you take a lump sum out of your super and kill the debt.”
Minimise tax by putting more funds into super
An unbeatable strategy for a last minute injection of funds are transition-to-retirement allocated pensions. This strategy enables pre-retirees to continue working full-time, draw a transition pension while boosting their super by salary sacrificing up to $100,000.
Instead of receiving salary in the traditional sense and paying tax at a marginal rate, transition-to-retirement pensions permit salary sacrificing into super up to age-based contribution limits. There is no tax on investment earnings and once you turn 60 there is no tax on the money that is withdrawn.
From 55 to 60 the tax depends on the components used to start the income stream.
John Osborne, managing director, Osborne Yuille puts forward down-sizing the family home as a strategy to free up large lump sums to inject into super. “You can’t beat super from a tax perspective and if you salary sacrifice now you’ll be buying units at a bargain price,” he says.
Former UK residents
Carlo Ricupero, general manager, Wise FP Pty Ltd notes that pre-retirees who hail from the UK can boost their retirement savings by accessing the UK pension.
Ricupero points out that the UK has a very generous aged pension system and if national insurance contributions have been made there is an entitlement to a basic pension. “There are ways to top up those contributions and enjoy a substantial return on that money, giving you a guaranteed pension for life,” he says.
Seek professional advice
Superannuation, tax and social security regulations are complex. To maximize your position it is highly recommended that professional advice be sought. An initial meeting with a financial planner is usually free. Inquire about the fee structure. Fees are not always disclosed and they can eat into your retirement kitty.