How to manage your super in your 40s
With at least 20 years to retirement, you can afford to take a more aggressive investment approach. Here are 10 tips on how to manage your super in your 40s.
1. Become engaged
For most people aged in their 40s, retirement seems too far away.
They are focused on their immediate lifestyle and family responsibilities so building their superannuation isn't a priority.
This thinking needs to change. People need to shift their mindset and become more engaged with their superannuation in their 40s to give themselves the best opportunity to build a nest egg they can comfortably retire on.
2. Set retirement goals
Think about what income will be needed in retirement and set a target super balance to achieve before retiring. The Association of Super Funds of Australia (ASFA) has calculated that, to live a comfortable lifestyle from age 65, an annual income of $43,665 is needed for a homeowning single person or $59,971 for a couple.
As a rule of thumb, to preserve the capital balance throughout retirement people should aim to limit their annual pension to no more than 5% of their capital balance (subject to the age-based minimum drawdown levels).
For example, an annual drawing of $43,000 would require a balance of $860,000. For those happy to run down their super balance over their expected lifetime, then the annual pension should be no more than 8% of the capital balance. For $43,000 this requires $537,500.
3. Maximise contributions
With the reduction in contribution limits, it will be harder for people to build meaningful balances closer to retirement, as has been the strategy in the past. With the current limits, a steady approach will be needed from a younger age. In fact, people will need to start consciously building their superannuation in their 40s for the best opportunity.
This means increasing annual concessional contributions to the full $25,000 limit each year until age 65 if possible. For example, a 40-year-old with a balance of $200,000 could increase it to $1.6 million by age 65 if they were to make concessional contributions of $25,000 each year until the age of 65. This is assuming they have an investment strategy that generates a real return of 5% a year, such as a growth strategy.
Maximising concessional contributions can also be a very tax-effective strategy. It can be done via salary sacrificing part of one's income to superannuation, which is an effective way for people to save as the contributions are made from pre-tax salary and it is an automated savings option.
Since July 1, 2017, when new super reforms came into effect, people earning salary and wages are now also able to make voluntary contributions and claim a tax deduction in their personal tax return.
Take the example of Jason, who earns a salary of $112,000. Jason's employer makes the mandatory super guarantee contributions of $10,640pa on his behalf. If Jason were to salary sacrifice or make a personal contribution of $14,360, he would reach his maximum contribution limit of $25,000 for the year.
Doing so would reduce his taxable income by $14,360 and lead to an income tax saving of $5600. The extra contribution would be taxed at 15% within his super fund ($2154) resulting in an overall tax saving of $3446.
4. Use catch-up provisions
Those with a super balance under $500,000 will be able to carry forward any unused concessional contribution caps from July 1, 2019 for up to a five-year period.
This will allow people to make additional concessional contributions so that they can fully utilise any missed contribution opportunities, such as career breaks.
5. Equalise balances
Since the introduction of the super reforms in July, having more equal balances between a couple has become more important. If one spouse has taken a career break, for example, to raise children, their super may have fallen behind. This may also happen where one spouse has been earning a lower salary and therefore receives lower contributions.
Consider strategies such as contribution splitting, where an individual can request that up to 85% of their concessional contributions be split and transferred to their spouse's account. Where one spouse earns less than $40,000, the higher-earning spouse could make a non-concessional contribution on their behalf and receive a tax offset of up to $540.
6. The right investment option
Retirement may still be 20 to 25 years away, so the 40s is when people can afford to take more risk. In the current low-interest-rate environment, growth-oriented investments such as Australian and international equities provide attractive return potential.
In this phase of life people should consider adopting a more aggressive investment strategy where up to 100% of their super is invested in a high-growth option.
Growth investments will be more volatile over the shorter term but will provide the opportunity for higher investment earnings and capital growth. People are likely to have enough time on their side to ride out short-term volatility and be rewarded with greater return opportunity.
Most people are in a default investment option, which is likely to have an allocation of 70% to growth assets and 30% to fixed interest and cash. Adopting a higher- growth strategy means greater return potential, thereby maximising the final super balance.
Take the example of a 40-year-old with a $200,000 super balance who contributes $25,000pa until age 65. If they were to receive an average real return that is 1% higher at 6%pa, their final super balance would increase by $276,000.
7. Appropriate insurance
Having life insurance through super can be a great strategy and reduce out-of-pocket expense.
People should, however, make sure that this is appropriate for their overall needs. For example, income protection insurance is available through super but often comes with a shorter benefit period of two to five years. It may be more appropriate to have a policy outside super that has a benefit period to age 65 and is personally tax deductible.
8. Review fees
There's no point paying more than is necessary because they chip away at your precious savings.
9. Death benefit nominations
Make sure that beneficiary nominations reflect current wishes and circumstances. A super dependant must be named, which includes spouses, children or the estate. Death benefit nominations can be binding or non-binding. Ensure this is aligned with overall estate planning arrangements.
10. Consolidate accounts
To give super the best opportunity for growth, it should all be in the one fund. Having multiple accounts just isn't effective. Often when moving jobs people start a new super account and the balances of old accounts could be eaten up by fees. You can do a lost super search through the tax office.