One thing that many people may struggle to work out when looking at their financial future is how much money they will need to fund their retirement. When we are working and earning a wage we tend to have a good idea of what our income is and what are outgoings are, so we know how much money needs to come into the household. However, when we are thinking about a future that may still be decades away it becomes more difficult to determine how much is enough in terms of finances and funding.
Of course, it is always better to have more money than you need coming in rather than too little, so when you are trying to work out how much you might need in retirement it is better to overestimate than risk underestimating your needs. Studies indicate that most people will need around 60% of their pre-retirement income each year to enable them to maintain the lifestyle they have become accustomed to, so it is a good idea to base your calculations on this if you are not really sure how much you will need.
By the time you retire there are many outgoings that you will hopefully no longer have to deal with. This includes outgoings such as your mortgage payments (as you will hopefully have paid your mortgage off by then), travel costs to get to and from work, debts that you are currently paying down and other expenses you have now in establishing your lifestyle. However, you may also end up with expenses that you do not have to pay at the moment such as wanting more money to spend on activities and going out (given that you will have far more time on your hands), money to fund the travelling that you always dreamed of, and higher costs stemming from any increases in living costs.
You also need to take other factors into consideration for the future, such as increased medical costs that could come from poorer health as you grow older, increases in health costs, and how inflation might impact on your savings. Your personal goals for your retirement and your lifestyle will partly determine how much you will need to adequately fund your golden years and some people even take into consideration funeral costs or money to help family members such as grandchildren out when they get older.
Saving towards your retirement with super
One very effective way of saving towards a more comfortable and secure retirement is through superannuation funds, which are cost effective due to tax concessions and are a very popular means of funding your retirement years. However, some people believe that the compulsory super contributions made by their employers will provide them with sufficient funds to finance their retirement. This is not always the case, which you will realise once you have sat and worked out how much you are likely to need in your retirement to fund the lifestyle that you hope to lead whilst also providing you with enough cash for your day to day living costs.
With this in mind it is important to consider making personal contributions to your super, which means that you can start working towards a nest egg that will provide you with sufficient funding for your retirement and enable you to enjoy your golden years in comfort and without financial stress. Contributions to super can be made in a number of different ways and you need to consider which contributions best suits your circumstances and will enable you to build an adequate retirement pot for the future.
The four types of contribution methods for super are:
- Employer contributions: These contributions are mandatory and have to be made by your employer to adhere to the Superannuation Guarantee Act. These contributions are set to increase on an annual basis until they reach 12%, which will be in around 2019/2020
- Employee contributions: These are voluntary personal contributions that you can make to top up the contributions made by your employer.
- Spouse contributions: These are after-tax contributions that can be made on behalf of your partner subject to eligibility. Depending on the income of the spouse, greater tax benefits may be available with these contributions
- Self employed contributions: These are contributions that can be made by those who are self employed, and up to certain limits they may be tax deductible
Concessional and non-concessional contributions
When you are working out how much you need to try and save towards your retirement it is also worth bearing in mind the limits on concessional and non-concessional contributions so that you can make more informed decisions about your super contributions.
Concessional contributions are also known as deductible contributions and include:
- Employer contributions (compulsory)
- Employee contributions (voluntary)
- Self employed contributions
- Salary sacrifice contributions
The limits on concessional contributions stand at $25,000 per person per year, although there may be transitional caps available for those aged fifty and over. These concessional contributions are taxed at a rate of 15 percent but contributions that exceed the limits are taxed at the top marginal rate (including the Medicare levy) which means an additional 31.5 percent.
Non-concessional contributions are based on post-tax income such as:
- Spouse contributions
- Personal member contributions
When it comes to the limits on non-concessional contributions they are as follows:
- Up to $150,000 per year or $450,000 over a three year period if you are under the age of 65
- Up to $150,000 per year if you meet the work test and are aged between 65 and 74 years
- You cannot make non-concessional contributions to your super if you are aged 75 or over