Monday, September 29, 2014

Women and Retirement strategies

My daughter lives in Australia and she is very close to the averages cited in this article, so the advice here is important for her and other young women.

According to the Australian Bureau of Statistics (ABS), average super balances at retirement for women is around $105,000. The average man, however, will retire with almost double at $197,000. What can women do to boost their super savings?

According to ABS sourced data released by ASFA in its report, 'An update on the level and distribution of retirement savings', there is also a strong gender gap when it comes to current super balances, with women having an average of $44,866, while men have, on average, almost double. The disparity is across all age groups.

The cause of this disparity comes from women often having different personal pressures during their working lives to men - career breaks to raise children, subsequent part-time work, an over-representation in lower paid jobs and time out of work to look after sick or elderly relatives.
How to boost super savings

  • Start early: If retirement is still several decades away, you can make extra contributions to your super now and take advantage of time for investments to compound and grow, as well as recover from any short-term dips in the market.
  • Consolidate your super: Consolidating any super funds into a single account can reduce your fees and make it easier to keep track of your super.
  • Government co-contribution: If your total income is $33,516 pa or less and you make a $1,000 after-tax contribution to super, the government will contribute $500 to your super fund.
    • The amount of government co-contribution reduces for every dollar you earn over $33,516 pa and ceases once your total income reaches $48,516 pa.
  • Spouse contributions: If your spouse is less than age 70 and earns less than $10,800 pa, you can make a $3,000 after-tax contribution to their super account. This will qualify you for a tax offset of $540.
  • Super splitting: A strategy that allows you to transfer a proportion of your pre-tax super contributions from the previous financial year to your partner’s super account.
    • Couples who are married or in a de-facto relationship and include same sex couples can take advantage of this strategy.
  • Salary sacrifice: An agreement or contract with your employer for some of your pre-tax salary to be paid directly to your super fund, before income tax is deducted.
    • You don’t pay income tax on amounts you salary sacrifice to super. Instead your super contributions are taxed at 15%, which can be much less than your marginal tax rate.

Case study: Salary sacrificing before a career break
Tracy is a 35-year-old woman with $50,000 in super who earns $70,000 per annum,  plus employer super of 9%. She is projected to have $414,053 in super at the age of 65 if she works uninterrupted.

If, however, she takes a career break to raise children from the age of 40 until she’s 45, her final super amount will be a massive 14% less at $357,154.5

In order to avoid this problem, Tracy could add more to her super to catch up to the amount she would have achieved had she worked continuously.

If she plans ahead, she could salary sacrifice $5,627 pa in the five years before her break. However If she waits until after her break, she will need to salary sacrifice about twice as much – $10,608 pa – to close the gap and make up for the time she has missed.

Assumptions in the case study: Investment return (before tax, after fees) of 7.7%, inflation of 3% pa, salary increases of 3% pa, Super Guarantee of 9% pa effective super fund tax rate of 15%.
The advice given is strong, but this case study shows that the assumptions used are currently out of step with the reality of investing.  The authors assume a rate of over 7% which is not realistic in today's investment world, the also assume a 3% increase in salary a year when most workers are getting around 1 to 3%. 

Taken from a story written by Peter Wolfram on behalf of the Commonwealth Bank of Australia

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