Everyone’s situation in retirement will be different – we’ll each live for different lengths of time, and we’re likely to have different expectations about how much we need to be financially comfortable. But, as retirement gets closer, most of us will find our retirement nest egg rapidly becomes a greater priority. If our superannuation balance feels a bit small, we may start to panic.
“Many people retiring today find themselves in this bind,” says Damon Green, Senior Adviser at Australian Unity. “It’s purely because they have not spent all of their working lives contributing to superannuation at current rates.”
While the question of “how much will I need?” is highly specific to individuals’ situations, Damon says people should first try to get a realistic idea of what their spending in retirement might look like. From there, they can work back to see whether their balance will be adequate and, if not, what can be done to augment it.
“The earlier you contemplate and plan for what your actual budget in retirement is going to look like, the better,” says Damon. “Your starting point is the full Age Pension, and what quality of life that would provide – which is fairly basic.”
Damon goes on to explain: “The more self-funded you are above the level the Age Pension provides, the more options you’ll have for a better-quality lifestyle. If you’re concerned about your balance, you can consider your options.”
Damon says there are two main ways to boost your super balance: increasing your super contributions and using growth tactics.
“The first option is to aim to get as much into super as you can,” says Damon. “You have a concessional contribution cap, in which you can put up to $25,000 of before-tax money and pay only 15 percent tax on the way in.”
While the concessional tax rate means most people will typically receive the greatest benefit from pre-tax contributions, you can also make after-tax contributions to your super. “In terms of after-tax contributions, you can put $100,000 a year into super, or $300,000 over three years under the bring-forward arrangements, if you’re under 65 and have that kind of money available to you,” says Damon.
Pre-retirees can also tweak the investment options in their superannuation account to try to accelerate accumulation over the last few years, Damon explains.
“If you’re talking about a five- to 10-year time frame, you might look towards increasing your weighting to growth assets, shares and property,” says Damon.
“However, the closer you get to retirement, you do run the risk of exposure to a market downturn if you’ve loaded up on growth. You need to be able to manage that and have contingencies in place so that you’re not then selling down those assets at the wrong time.”
Such a contingency might involve quarantining funds to cater to that eventuality – for example, “splitting” your super balance and allocating a certain amount to a more defensive investment profile that would cover a drawdown. Your investment in growth assets can then have a time frame beyond your retirement deadline, allowing for recovery if there was a market downturn.
However, your ability to increase your wealth doesn’t necessarily stop at retirement.
Increasing your allocation to growth assets after retirement is also a legitimate strategy to earn more on your super funds if you are drawing an account-based pension, says Damon. While many people won’t be willing to risk holding growth assets in retirement, it may be necessary in order to help to replenish your funds – particularly as life expectancy is on the rise.
“Many people are surprised by the fact that a significant amount of their retirement funding comes from investment earnings on their super balance while they are drawing down on their funds,” says Damon.
Another option is to purchase income-producing assets such shares or investment properties in your own name, which can help to augment your income in retirement. While this won’t suit every client, there will be some for whom it is relevant.
Retirees who own their home can also consider downsizing. Selling a larger home can boost your retirement kitty and, as a result, your post-retirement income stream. However, this should always be balanced against the impact on any Age Pension entitlements you can expect to have.
Another lever that can be pulled, says Damon, may be working for longer. “Once again, this is different for everyone, but it may be possible for you to extend your retirement date for a period of time – perhaps by working part-time prior to full retirement.”
Retirement can be daunting if you’re worried that you may not have enough money saved. The good news? There are strategies and approaches that can help to increase your wealth over a shorter time frame – as long as you understand the risks involved.