Step 1: How much do I need?
Superannuation is a tax-effective means of saving for your retirement. It's not an investment in itself – like shares or property – but a vehicle for such investments that gives you access to tax breaks.
Those tax concessions are the federal government's way of encouraging Australians to save for their own retirement, so they won't have to rely on the government for a pension.
Organise your superannuation well and you'll be able to enjoy life after you stop working, rather than merely surviving on the government age pension – which is in reality only a 'safety net' payment.
In times gone by, when life expectancy was shorter, many people managed to live off their savings and the age pension in retirement. But with retirement now lasting 20 or 30 years, the need has never been greater to have a sizeable nest egg.
According to one estimate, you'd have to save 12 per cent of your annual income for 40 years of your working life to provide an income equal to 40 per cent of what you were earning before retirement.
Under this scenario, if you were earning $50,000 a year, you'd have to learn to live on $20,000 in retirement.
However, most of us would be more comfortable living on an income equivalent to at least 60 per cent of our pre-retirement salary – or $30,000 in this example.
What's more, the above illustration is on the basis of saving 12 per cent of your income – a third again above the 9 per cent of income that is diverted to super by your employer under the superannuation guarantee contribution (SGC) scheme.
Sure, your expenses are less in retirement – no commuting, no work clothes, no school fees, hopefully no mortgage – but you'll probably have to top up your super if you want to be able to actually enjoy your retirement, whether that involves travel or theatre tickets or eating out.
Consider your expenses in retirement:
- Home maintenance
- Utilities bills
- Replacing the car
- Vehicle running costs
- Health insurance
- Medical expenses
- Services such as cleaning
- Support for children and grandchildren
Advisory: Superannuation law is notoriously complex and subject to frequent change, so the information below can be only general in nature. A number of Federal budgets over the last few years have included some major changes to the rules surrounding super. Talk to a superannuation adviser to see how the rules apply in your individual circumstances.