How much do I need to retire?
According to a report by AFSA, the superannuation industry's leading body, to live a 'comfortable retirement' a couple needs around $59,808 a year while a single needs $43,538 a year.
They define 'comfortable' as one annual holiday in Australia, eating out regularly, good clothes and a reasonable car.
What does it take to generate that income?
Thanks to record-low interest rates, you can get a Commonwealth Bank of Australia (ASX: CBA) term deposit offering yearly interest rates of around 2.35%. Ouch.
National Australia Bank Ltd. (ASX: NAB) is offering the same rate.
However, online-only bank ING Direct is offering 2.7%, plus a loyalty bonus of 0.1% if you keep the funds in the account for the full term. That's an easy 15% more bang for your retirement buck, just for shopping around.
However, even at 2.7%, to get to a 'comfortable' yearly income a couple would need a meaty $2.2 million in retirement. A single needs $1.6 million.
Strategies to boost retirement living
If you are as worried about retirement as the rest of us, here are some of the most popular ways you can boost your retirement income:
1. Work longer.
Sounds simple. And it is. Working beyond your preservation age, the age you can begin to access superannuation, means that you are not chewing away at your savings but adding to it. Remember, most super funds pay tax at just 15%.
2. Use a transition to retirement strategy.
This allows you to draw up to 10% of your superannuation balance once you reach preservation age. Importantly, you can invest the income you receive in your personal name and replace the super income via salary sacrifice. Transition to retirement strategies are popular for those seeking to minimise their tax bill.
3. Salary sacrifice.
Starting July this year, the annual limit on before tax superannuation contributions (aka 'concessional contributions') is being reduced to $25,000. That means, if there is any room left after your employer's superannuation guarantee (most exmployers pay 9.5% of your wage into super), you can salary sacrifice the difference before tax.
That lowers your taxable income and your contributions will incur a tax of 15% going into the fund — that could befar better than your current tax rate. There are conditions (e.g. for people earning more than $300,000), so it's best to speak to a qualified professional.
There's a low-income super contribution, too.
4. After-tax contributions.
You can contribute to superannuation after you have paid tax on your income, up to a yearly limit of $100,000. If you are under 65 with less $1.4 million in super, you can contribute up to $300,000 in one year — using the 'three-year bring forward rule'. As with any of these strategies, speak to your adviser.
5. Downsizing.
The 2017 Budget delivered a 'downsize' strategy for homeowners over 65. If you have lived in your house for 10 years or more, you can sell your home and contribute $300,000 to superannuation and it won't affect pensions or limits on super balances. It's a bit of a gimmick, but it could help those who are 'asset rich but income poor'.
6. Move up the risk curve.
This is perhaps the most straightforward strategy and my preferred strategy for younger people and some retirees. Instead of investing 100% in term deposits offering less than 3%. Or maybe even less than 2% after tax. Or perhaps less than 1% after inflation. You can invest in a more diversified portfolio, including shares and property, for a potentially greater return.
One way you can do that is by investing some of your portfolio in the sharemarket. You could invest some money in the US, for example, and in Australian shares. Australian shares have the added benefit of offering franking credits, a tax-effective credit that can boost your after-tax dividend income. The yields on some high-quality Australian shares (see below) are in excess of 5%, plus franking credits.
Foolish Takeaway
Saving for retirement isn't easy. The statistics are scary. And it seems everyone is out to take your money. However, if your life expectancy is more than 10 years or you haven't yet retired, in my opinion, it makes sense to have exposure to the sharemarket. It's vital to consider the added risks, but as an example shares of Telstra Corporation Ltd (ASX: TLS) are forecast to pay a dividend of over 9% in after-tax dollars.
