Most of us dream of the day we can stop working and start ticking off our bucket list. Whether you dream of cruising Alaska, watching the sun rise over Uluru, improving your golf handicap or spending time with the grandkids, superannuation is likely to be a major source of your retirement income.
Estimating your needs
Financial commentators often suggest you will need around two thirds (67 per cent) of your pre-retirement salary to enjoy a similar standard of living in retirement.i Lower income households may need more because they typically spend more of their income on necessities before and after retirement.
The latest ASFA Retirement Standard estimates that a couple retiring today needs a retirement super balance of $640,000 to provide a comfortable standard of living. This would provide an annual income of $60,977.ii
Singles need a lump sum of $545,000 to provide a comfortable income of $43,317 a year. These figures assume people own their home and include any entitlements to a full or part Age Pension.
How do I compare?
According to the latest figures, the mean super balance for all workers is $111,853 for men and $68,499 for women. The mean balance at retirement (age 60-64) shows most people retiring today fall well short of the amount needed for a ‘comfortable’ retirement. ii
The gap between men and women persists at all ages. By the time women reach their 60s they have 42 per cent less super than men on average and are more likely than younger women to have no super at all.
How can I boost my super?
If your super is not tracking as well as you would like, there are ways to give it a kick along. When your budget allows, or you receive a windfall, consider putting a little extra in super. Even better, set up a direct debit or salary sacrifice arrangement.
You may be able to make a tax-deductible contribution up to the $25,000 annual concessional cap but be aware that this cap includes employer contributions and salary sacrifice.
You may also be able to contribute up to $100,000 a year after tax, or $300,000 in any three-year period. You can’t claim it as a tax deduction, but earnings will be taxed at the maximum super rate of 15 per cent rather than your marginal rate and you can withdraw the money tax-free from age 60. Your age and the amount you have in super can restrict the amount of contribution caps.
If you earn less than $37,000, your other half can contribute to your super and claim a tax offset of up to $540. The offset phases out once you earn $40,000 or more.
If you are a mid to low income earner and make an after-tax contribution to your super account, the government will chip in up to $500. To receive the maximum, you need to earn less than $37,697 and contribute at least $1,000 during the financial year. The government co-contribution reduces the more you earn and phases out once you earn $52,697.
Speak with your employer about directing some of your pre-tax salary into super. ‘Salary sacrifice’ contributions are taxed at a maximum of 15 per cent (30 per cent if you earn over $250,000). But stay within your concessional contributions cap of $25,000 a year, which includes employer contributions.
To work out the difference extra contributions could make to your retirement nest egg, try out the MoneySmart retirement planner calculator.
As the end of the financial year approaches and with the federal election looming, this is a great time to utilise your annual contribution caps and get a tax deduction for voluntary concessional contributions. If you would like to talk about your retirement income strategy, give us a call.
i Moneysmart, Last updates 27 Aug 2018, https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-contributions/how-much-is-enough
ii ASFA Retirement Standard, 1 December 2018, https://www.superannuation.asn.au/resources/retirement-standard
iii Superannuation Statistics, March 2019, ASFA, https://www.superannuation.asn.au/ArticleDocuments/269/SuperStats-Mar2019.pdf.aspx?Embed=Y
Paving the way to an election
Treasurer Josh Frydenberg has delivered a ‘back in the black’ Budget aimed squarely at voters, stressing the Morrison Government’s commitment to financial discipline and low taxes.
As expected, the Treasurer signaled sweeping tax cuts and major infrastructure spending if the Coalition wins the upcoming federal election widely expected to be held in May.
This largesse is made possible as the Budget heads towards surplus for the first time in 12 years. Extra revenue has flowed into the Government’s coffers from a surge in company tax on the back of higher commodity prices, and a higher personal tax take as more Australians find work.
The Big Picture
The Federal Budget is all but balanced. The Government expects a small underlying Budget deficit of $4.2 billion this financial year, unchanged since the mid-year Budget update in December, before moving to a $7.1 billion surplus in 2019-20.
The Budget’s big spending promises come despite a worsening economic outlook over the past six months. The Treasurer forecast growth of 2.25 per cent this year rising to 2.75 per cent in 2019-20 and 2020-21, slightly lower than the 3 per cent forecast in the mid-year update.
Growth could also suffer from a cut in the permanent migrant intake from 190,000 to 160,000 a year. The Government predicts current net debt of $370 billion will fall to 18 per cent of GDP in 2019-20 and be wiped out in 10 years.
Bigger tax cuts
The centerpiece of the Budget is an extension of the already announced multi-year tax package. Low and middle-income workers will receive immediate income tax relief of up to $1080 for single income families and up to $2160 for dual income families from 2018-19.
By 2024-25, 94 per cent of taxpayers on incomes below $200,000 will pay no more than 30c tax in the dollar. Incomes above $200,000 will pay 45c in the dollar.
The Low and Middle Income Tax Offset (LMITO) will almost double from $530 to a maximum of $1080 a year for people earning between $48,000 and $90,000, to be received after people submit their 2018-19 tax return. People on income below $37,000 will receive an offset of up to $255.
The popular instant asset write-off for small business has been increased from $25,000 to $30,000 a year, extended to businesses with turnover up to $50 million (previously $10 million) and will apply as of 2 April 2019. This allows small and medium size businesses to deduct the cost of assets such as cars and equipment.
Major infrastructure spending
The Government’s other signature spending initiative is a $100 billion boost to infrastructure spending over the next decade, an increase of about one third on last year’s Budget.
This includes $2 billion for a fast rail link from Melbourne to Geelong. The Government will also co-fund five business cases with state governments for fast rail from Sydney to Wollongong, Sydney to Parkes (via Bathurst and Orange), Melbourne to Albury Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast and will build on projects already underway.
There is also a $3 billion increase (to $4 billion) in the Urban Congestion Fund, including $500 million for a commuter carpark fund.
A further $1 billion will be invested to improve the Princes Highway in NSW, Victoria and South Australia, with additional funding for road and rail projects in all states and territories.
Beefed up regulation and compliance
In the wake of the Banking Royal Commission, financial regulators Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) will be given a boost of more than $550 million to clamp down on misconduct.
The Australian Taxation Office will be given extra funds to crack down on welfare cheats and tax dodging.
Healthcare and welfare
The Government has pledged $527.9 million for a Royal Commission into the abuse of people with disabilities. It has also recommitted to fully funding the National Disability Insurance Scheme, but a slow take-up of the NDIS has delivered a $1.6 billion saving to the Budget's bottom line and contributed to the projected Budget surplus.
In response to the national crisis in mental health and youth suicide, $461.1 million will go to prevention and treatment programs.
The creation of a new $337.2 million drug strategy to address harmful opioid use, improve family support services and increase capacity of drug and alcohol services in remote and regional areas.
The cashless welfare card will be extended to all the Northern Territory and Cape York communities in Queensland at a cost of $129 million.
Aged care services will receive a further boost of $282.4 million to fund 10,000 new home care packages and increasing home care supplements for dementia and cognition.
In a bid to help older Australians boost their retirement savings, the Government intends allowing 65 and 66-year-olds to make voluntary contributions to their super from 2020-21 without meeting the work test.
The same group will also be allowed to make three years’ voluntary non-concessional (after tax) contributions, currently capped at $100,000 a year, in one year.
There are no big-ticket announcements for schools or universities, but $453 million will go to extend pre-school education in the year before school.
The focus instead is on a new $525.3 million skills package to provide vocational education and training that will fund 80,000 new apprenticeships and double incentives to employers to $8000 per placement.
Training hubs will be established in 10 regional areas with high youth unemployment.
Environment and energy
The Government hopes to shore up its climate and energy credentials with $3.5 billion for a new Climate Solutions Package, including $2 billion for the Climate Solutions Fund (previously called the Emissions Reduction Fund).
Pensioners, carers and veterans will receive a one-off cash payment to help with energy bills. The Energy Assistance Payment is worth $75 for singles and $125 for couples.
It has also previously announced $1.4 billion for Snowy Hydro 2.0 and a $56 million Battery of the Nation in Tasmania.
Regional communities will receive $6.3 billion in drought support and $3.3 billion in flood support. A $3.9 billion Emergency Response Fund will be set up to help with future natural disaster efforts.
There will be a continued focus on national security, with $512.8 million for the Australian Federal Police and $58.6 million to the Australian Security Intelligence Organisation.
The Government will also spend $34.8 million over four years to counter foreign interference.
This is an unusual Budget as there will be little chance of legislating most of the spending measures before a federal election in May.
The biggest risk to the Budget forecasts for growth is the falling property market and concerns that it could flow through to the broader economy. According to CoreLogic, national house prices are down 7.4 per cent since their 2017 high, with most pundits predicting further falls this year.i
Monetary support could come from the Reserve Bank which announced yesterday the official cash rate will remain on hold at a record low of 1.5 per cent while also signaling it is prepared to cut rates this year to support growth if needed.
For its part, the Government’s proposed tax cuts and other stimulus measures could provide the kick the economy needs to get people spending, companies hiring and flat wages rising.
Labor has flagged it will deliver its own economic statement later this year if elected. We will have to wait until after the election to see whose policies will take Australia forwards.
It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.
As you’ll be aware the Federal Budget announcement is fast approaching. The Econ FS team will be hard at work after the announcement making sure we provide you with a sophisticated but accessible wrap-up of the Budget’s impact the very next morning. Keep your eye out for our 2019 Budget Snapshot this Wednesday!
Click on the title to read great advice from Julia Gillard on how to better tackle women’s mental health needs.
We are proud to announce our continued sponsorship with the West Tigers at the 2019 season launch this morning. Good luck to Benji Marshall, David Nofaluma and the entire team involved in West Tigers. Would also like to send a big congratulations to Moses Mbye, we are sure you'll lead the team to success!
Wishing you all a Happy Chinese New Year! May the year of the pig be prosperous for us all. To recap the last month, here's what you need to know for the cash rate and latest economic developments in 1:34 minutes.
When it comes to setting financial priorities, medium-term goals often suffer from middle child syndrome, not taken as seriously as the oldest or indulged as much as the youngest.
The serious long-term goal of saving for retirement gets lots of attention, and rightly so. It’s super important. And next year’s trip to Bali will be so much fun, even if it does drain all your savings.
Sometimes, when thinking about your long-term financial goals, they can seem so big as to be insurmountable. But the truth is, those that achieve financial success don’t usually do so by encountering a sudden windfall. Rather, they have in place a set of small habits that allow them to work towards their dreams. And by investing small amounts over the long-term, they see big outcomes.
Some helpful tips to join the conversation movement with the EFS team in national “R U OK?” day today. If you notice someone who might be struggling, start a conversation.