With the Reserve Bank of Australia dropping the cash rate to a fresh record-breaking low of 1.5% on Tuesday, August 2, combined with higher life expectancy for Australians and extensive changes to the superannuation system, questions are already arising around what low interest rates really mean for retirees and savers. While good news for borrowers, many of our clients have been asking the question, “How do I protect my retirement?”.
Most of us are in what’s known as “accumulation” superannuation funds, which are similar to savings accounts. With accumulation funds normally invested in the stock market through allocated investment options, when the market fluctuates, so does the fund balance. According to Glenn Stevens, “many of the owners of accumulation funds are going to feel disappointment”, and those record-breaking low interest rates are predicted to hang around longer than expected.
With interest rates predicted to remain low for longer than expected, how do Australians protect their retirement income without moving further out along the risk curve than planned?
With 25% of the population to be over 65 years old by 2041, it’s important that everyone, particularly those over 45, should be focusing on their retirement, or at least aware of the impacts of our changing environment.
Unfortunately, you can’t control interest rates, but you can give yourself as much time as possible to prepare and control the things you can control.
Boost your Balance
“Decide how much you spend and how much you contribute to your super.”
According to the Australian Securities and Investment Commission, starting to make your own contributions is the “best way” to boost your retirement balance. This means topping up on your employer’s contributions by making both concessional and non-concessional contributions.
Set goals to define your needs
Define the financial goals you would like to reach by retirement age, and calculate what percentage of your current salary you need to set aside to get there. The ASFA Retirement Standard benchmarks a retired Australian couple’s modest lifestyle requiring $34,064 per year and a comfortable lifestyle at $58,922 a year. For example, say you have $200,000 in super and 20 years before retirement, just $86 a week sees you get to $1 million (on a 7% return).
Consolidate missing super
If you’ve held more than one job over your career, you may have lost super funds. Avoid paying higher fees with money in multiple super funds and don’t let valuable accounts go missing. If you have 3 super accounts you are paying 3 administration fees. If each fund is charging you, say $5 per month, then you are paying $180 per year. Over time that difference really adds up and you could make considerable savings by only running the one account. You’d also be earning interest on that extra money, and again over the long term that can add up.
In the long run, it’s better to double check if you have missing super and to consolidate them into one fund now. The ATO has a range of resources to find your super, including SuperSeeker.
Attention to detail at tax time
Before-tax contributions could save you money at the end of the financial year. Also known as concessional contributions, they can include tax-deductible contributions, contributions made under a salary sacrifice arrangement and more. Read more about salary sacrificing here (http://compfinancial.wpengine.com/salary-sacrifice-super-in-the-new-financial-year/).
Revisit your current position
Although we are discussing changing your future, it would be worth revisiting your current saving habits. In some cases, they may have become outdated. They might be hindering your ability to save for retirement.
Whether starting early or playing catch-up, your retirement efforts can reach your goal. Sharp control of your own financial habits is the key, wherever you begin.
If you would like to discuss your situation in the context of your retirement, don’t hesitate to call.
This article is for general information purposes only. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the information, consider its appropriateness to your circumstances.
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