This month there were two sets of data released that may be a cause for concern for those who are approaching retirement.
On August 18th the Association of Super Funds of Australia revealed that retirees will now need to spend more in order to retire comfortably. Couples aged around 65 will need to spend $66,725 per year and $47,383 for singles.
Figures released on 23rd August by the Australian Bureau of Statistics showed the median balances in super funds for men over 65 was $208,200 in 2020 and the equivalent for women was just $168,000.
These statistics alone are frightening because they are in today’s dollars and with inflation on the rise, imagine what you will need for a comfortable retirement.
Funding your retirement adequately is dependent upon not only your super fund balance but also your other assets the most significant of which is most likely your home which in many cases may have to be sold to fund living expenses and the cost of aged care.
Most of us have mortgages on our home and it is a difficult decision if you have surplus cash as to whether to pay down the mortgage and increase equity in your home or make additional super contributions which will be unavailable to draw on until you satisfy the conditions of release.
From a tax point of view building up equity in your home will increase the net proceeds from sale which are tax free unless there has been a period during which your primary residence was used to generate assessable income.
Making additional contributions to super that are non-concessional are currently limited to $110,000 per annum or can be increased to a maximum of $330,000 if you pull forward the following two years maximum amounts. Non-concessional contributions are not tax deductible and are not taxed to your super fund.
Alternatively concessional contributions are tax deductible and capped at $27,500 or more if you add catchup contributions from up to five previous years from 2018/19 onwards where contributions have been less than the cap of $25,000. Concessional contributions are tax deductible to you at your personal marginal rate, but are taxed to your super fund account at 15% leaving 85cents per $ in the fund to grow your super fund balance.
If your marginal tax rate inclusive of the Medicare levy is in the range from 34.5% – 47% it would make sense to prioritize making concessional contributions as your overall tax saving would be your marginal rate less 15%.
So here is the dilemma. The power of compounding demonstrates the sooner you build up your super fund balance the more comfortable your retirement.
However how can you afford to make personal contributions to your super fund when you are saving for the deposit for a house, getting married, having children and educating them and struggling to cope now with rising interest rates and rampant inflation?
So, what can you do if your employer super guarantee contributions, currently set at 10.5% plus any personal super contributions are unlikely to yield an adequate income to fund your retirement?
Possible Solutions.
- Continue working beyond preservation age, even on a part time basis and continue making super contributions. It is likely the Albanese government may legislate to make this opportunity more attractive in the near future. This is a positive strategy providing your health and circumstances enable you to continue working.
- Take out a reverse mortgage on your home but this could become increasingly risky if interest rates continue to increase.
- Take advantage of the Downsizer Super Contribution.
The Downsizer Super Contribution Solution
Since 1st July 2018 this solution has been available to provide incentives for qualifying older Australians to sell their home and if they so choose, to downsize to a smaller cheaper residence.
When introduced, this provided an opportunity for persons aged 65 and over to make a non-concessional super contribution up to a maximum of $300,000 for a single person and $300,000 each for a couple.
The Morrison government had legislated to reduce the eligible age to 60 from 1st July 2022.
The Albanese government introduced legislation into the House of Representatives on 3rd August to make a further reduction in the eligibility age to age 55 in less than two months since the reduction to age 60.
The bill is currently in the lower house, but when passed by the Senate the change will start on the first day of the first quarter after the day the bill receives royal assent and the amendments will apply to downsizer contributions made on or after the commencement date.
In the October edition of the Diary I will explain in detail how you may qualify for making a “downsizer superannuation contribution”.
Disclaimer:
The content of this article is not intended to be used as professional advice and should not be used as such. Brian Spurrell B.Com. BA, FCPA, Registered Tax Agent, is Director of Personalised Taxation & Accounting Services Pty Ltd. PO Box 143 Warrandyte 3113.
Ph: 0412 011 946
Email: bspurrell@ptasaccountants.com.au
Web: www.ptasaccountants.com.au