Early Retirement? You're Dreamin' | BTalk Australia

Last Updated Jan 20, 2009 11:36 PM EST

Podcast

The AMP Superannuation Adequacy Index recently demonstrated that many Australians don't have enough money for a comfortable retirement. Today on BTalk Australia Phil Dobbie asks Michael Davison, CPA Australia's Superannuation Policy Advisor, who is most at risk and how realistic is it to expect an early retirement.

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  • Today's Transcription
Phil Dobbie: I'm Phil Dobbie and welcome to BTalk Australia. Today, we talk superannuation. Is there a magic formula that will help you to retire earlier? And, are you doing the right thing for your employees? That's coming up. A couple of weeks ago, the AMP Superannuation Adequacy Index showed us that many Australians still don't have enough money for a comfortable retirement. So how do you plan for your retirement? The laws and regulations around super seem to be a bit of a minefield. Michael Davison from CPA Australia joins us. He's the superannuation policy advisor. Michael, when is the time to retire? I mean, it used to be 65 used to be the norm, but I think a lot of people would like to retire earlier, you know, maybe even in their 50s. Should we tell them they're dreaming?
Michael Davison: I'm not sure, Phil, if dreaming the right word but 65 still seems to be the optimal age. There's even debate about whether we should be retiring later. Our research shows, similar to the AMP research, that someone of middle income --- around $50,000 retiring at 65 --- they're looking at a replacement right about 75 percent of their pre-retirement income.

Dobbie: Right.
Davison: So the question is more whether you want to retire earlier or not, it's more can you afford to?

Dobbie: Yes, that's right. And to be able to afford to, is there a magic formula? Is it as simple as putting more money into superannuation?
Davison: There is no magic number. Our research showed if you just relied on the super guarantee for 40 years, like say through your working life at 9 percent, and you wanted to retire at 60, then you're looking at a dropping in living standard of about 20 percent less than if you retire at 65. At 55, it's about a third less.

Dobbie: Wow.
Davison: So, yeah, to retire early, or even to retire comfortably at 65, the key is to be putting more into your superannuation --- more than what your employer's putting in, the 9 percent compulsory super.

Dobbie: So it sounds like they might be dreaming, because what you're saying is you've got to take quite a big drop in your living standard if you want to retire early.
Davison: For someone who's earning $75,000 and wants to retire at 55 compared to 65, they can expect a benefit of about half of what they would get at 65.

Dobbie: What about if you're forced to retire early? I mean some people can find themselves out of work in their 50s and be finding it hard to get another job. Is there contingency there that they can plan for?
Davison: What we're really suggesting is to build that contingency into to your retirement savings as early as you can. Don't just rely on SG and that's going to be enough for when you retire, look at putting in an extra 3 percent or 6 percent away so you do have the buffer.

Dobbie: Now these Australians who are falling short on having enough money for a comfortable retirement, presumably, they are people who are in the later stages of their career.
Davison: That's right, and it's fair to say superannuation has gone like leaps and bounds in the last few years, but the full benefit is going to be enjoyed by people who are starting work now. The people who are at the closer end of retirement, end of their working careers, really do need to look at putting more money into super when they can, bearing in mind we now have limits on how much you can put in each year. So this concept of waiting until you're in your 50s then pumping in as much money as you can into super, are gone. You need to start putting in more regular amounts from an earlier age --- if you're 45, don't think you can wait till you're 55 and whack in a $100 grand each year for five years until you retire. You probably want to be putting in 20 or 30 now, each year. And really, what we've found, just by contributing even an extra 3 percent, you can lift your retirement savings by about 25 percent. I think our numbers show that someone who is 45, if they contribute 6 percent after tax, will increase their retirement benefit by 25 percent.

Dobbie: Now, some super funds have been going backwards of late, which is, which is perhaps not bad news if you're in the early stages of your savings. But, if you're in the later stages, I mean, presumably, some people are seeing a big chunk of their nest egg disappearing over the last 12 months.
Davison: It's a real problem, and that's the vagaries of investing --- you want to invest in great growth assets like shares, and over time, they do improve. And the three or four years beforehand, we were seeing very good returns from our superannuation. If you want to take that risk and, and invest for better returns, then you've got to be comfortable with taking the hit every once in a while.

Dobbie: So I guess, take the risk early on in your savings plan and perhaps look for more secure investments later.
Davison: Exactly. I think, when you're getting into that stage where you're getting close to retirement or if you are in retirement, it comes back to diversification. It's great chasing the 20 and 25 percent returns we've had, but you also want to be covering yourself for that contingency when returns fall. Or, as we've seen, when returns go negative. I've seen it suggested that when you're taking income from your super, say through a pension, keep enough in reserve, in less riskier investments, to keep a couple of years' worth of pension reserved just to cover that contingency.

Dobbie: We've seen it and fairly minor changes in the budget to superannuation, that just about the only one, before if I salary sacrificed to increase my super contributions, that reduced my income in the eyes of the government. So I was able to get below that threshold to get government superannuation contributions. Is that about all that's changed?
Davison: It was a very quiet year this year in the federal budget for superannuation after the last couple of years of simpler super. Yes, the only super change is they've tightened the eligibility for government support. And one example is the co-contribution. Before, you could reduce your income through salary sacrificing and reduce your taxable income to the point where you could gain access to what is the low income owner's co-contribution. The government felt that probably wasn't quite in the spirit of the benefit. They've tightened the rules now, your total income plus salary sacrifice will count towards your eligibility. Whilst it's an avenue that's been cut off, it's probably not necessarily a bad thing because it was being used for ways other than what it was intended.

Dobbie: But bad news, if you were one of those people.
Davison: Yeah.

Dobbie: Which is sort of like the middle income bracket, I guess.
Davison: And to be fair, people were using benefits like this because they were able to within the spirit of the law. So yes, if you are using it, make the most of it while you can, before it gets taken away.

Dobbie: It's all going away next year.
Davison: That's right.

Dobbie: Now, what about implementing a sensible superannuation plan for your employees?
Davison: The 9 percent compulsory super guarantee is a basic entitlement for all employees. In this time when the employment market is quite tight and we have this skill shortage in particular industries, superannuation is becoming, again, an attractive part of remuneration packages. And if that's the case, we're looking at contributing more than just the 9 percent. The other side of that is insurance coverage for your employees as well. Super provides a very good vehicle for providing death and disability insurance at quite a reasonable cost through the tax deduction you can get through your super for premiums, which means you can be offering insurance for your employees, not just obviously for their benefit, but for your peace of mind as well.