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Life after work

5 reasons to save for retirement

20 December 2017

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Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Saving for retirement might not seem important, especially when there’s the super guarantee and aged pension to fall back on. But employer contributions and government benefits may not keep you as comfortable in later life as you’d like. Here are 5 reasons to make saving for your super a priority in the coming year. 

Whether you’re near retirement or not, it’s important to get your head round what to expect from your super. The system can seem pretty complicated at times and keeps changing, depending on the latest government policies and announcements. So here’s a quick rundown on what your employer is required to contribute to your super savings, now and in the next decade.

No matter what type of job you have, casual or permanent, part-time or full-time, your employer is required by law to pay contributions to your nominated super fund under the Superannuation Guarantee (SG)[1]. The current SG rate is 9.5%[2], so your employer must pay 9.5% of your annual salary as a contribution to your superannuation.

According to current government policy, the SG rate is scheduled to rise to 10% on 1 July 2021. The rate will then continue to increase by 0.5% each year (10.5% in 2022, 11% in 2023 etc.) until it reaches 12% on 1 July 2025[3].

With these changes to the SG rate, you can expect more from your super savings without having to top it up with your own contributions. But it’s still worth looking at how much you have saved now and whether you’ll need more when retirement rolls around in five, 10, 20 or even 30 years’ time. And if you’re self-employed, you may not benefit from SG payments and should look at prioritising super savings, along with your other business and lifestyle goals.

Here are 5 reasons why saving extra super is worth thinking about: 

1. You can expect to live longer

The good news about your retirement years is they’re getting longer. According to figures from the Australian Bureau of Statistics, life expectancy in Australia is on the up. In the last decade, it has increased by 1.7 years for men and 1.1 years for women. Based on a retirement age of 65, men and women can expect to spend on average 15.4 years and 19.6 years respectively in retirement. So that’s more time to enjoy life after work, but it also means your retirement savings need to last longer too.

2. You have a bucket list

Even if you’ve lived a full life, chances are there are things you’re looking forward to doing in retirement. Perhaps you have plans to travel the world, or take up a new hobby? Or you may have more modest plans that involve spending quality time with family and friends.

Whatever your version of doing the “bucket list” may be, chances are you’ll enjoy it more and feel less stressed if you have a decent retirement income to rely on.

According to the Retirement Standard published quarterly by the Association of Superannuation Trustees, a couple living a comfortable life at the age of 65 need $60,063 per year, assuming they own their own home without a mortgage. A comfortable lifestyle means being able to afford things like a fairly new car, private health insurance and the chance to travel overseas now and again. But your definition of comfort will probably depend on how you’re used to living – and spending – in the lead up to retirement. If you want to maintain your standard of living once you’re no longer earning, you’ll need to budget and save accordingly.

3. You don’t have a crystal ball

Having money saved for a rainy day is always a good idea. An emergency fund can keep you from facing financial problems – or getting into debt – when you’re dealing with the unexpected.

Your plan and your budget for retirement is bound to be based on a few assumptions about your health, where you’ll live, how you’ll spend your time and who you can rely on for support. But if circumstances change – if you were to fall ill for example, or need to make changes to your home so you can continue to live there – having some extra savings up your sleeve can make all the difference. When you know you’ve got the money to cover unforeseen expenses, it can help you make positive choices instead of being forced to make changes due to financial need.

4. You could save on your tax bill

If you make extra payments into your super within certain limits, you can actually save on the tax you pay. Each financial year you can add up to $25,000 of your earnings into your super as concessional (before-tax) contributions. What this means is you’ll pay only 15% tax on income that you save into your super fund up to this $25,000 cap. This amount includes the contributions your employer is making under the SG.

So depending on your marginal tax rate, you could reduce your annual tax bill by making savings into your super. Some employers offer a salary sacrificing arrangement that allows you to have pre-tax super contributions taken from your monthly or fortnightly salary payments. Your payroll will take care of all the necessary PAYG calculations so you can benefit from paying less tax on your take-home pay. So although you’re putting savings away for the future, you can be putting money back in your pocket here and now with less tax to pay.

5. You can harness the power of compounding

Topping up your super with a relatively small regular amount can make a significant difference to how much you’ll have to live on when you retire. Whether you save $50 or $500 each month, the sooner you start, the more your super investments are going to grow in the longer term. And as those investment returns mount up, they in turn will earn you more. It’s called the power of compounding and it’s one of the most important principles of investing and saving for the future. With time on your side, even a modest savings target can end up having a remarkable impact on your future finances.

If you’re still trying to talk yourself into making super savings a priority, have a look at some common superannuation stumbling blocks and how you can get over them. And if you’re not sure how much super you have, find out how to track down your super and bring it all together.

[1] Australian Taxation Office, Working out if you have to pay super https://www.ato.gov.au/business/super-for-employers/working-out-if-you-have-to-pay-super/
[2] Australian Taxation Office, Super Guarantee Percentage, https://www.ato.gov.au/Rates/key-superannuation-rates-and-thresholds/?page=23
[3] Australian Taxation Office, Super Guarantee Percentage, https://www.ato.gov.au/Rates/key-superannuation-rates-and-thresholds/?page=23