How to maximise super contributions

For the current group of fifty somethings in particular, the ability to rebuild balances by pouring in extra money is key to reclaiming a comfortable retirement. Yet since the international meltdown, the annual contributions cap has been repeatedly reduced.

In its 2009 budget, as the government sought to combat the crisis, the cap for 50-pluses was unexpectedly slashed 50 per cent from $100,000 to $50,000.

It announced last year that those with balances under $500,000 - so the people who need it most - would be exempt from a further halving of the limit from July 2012 to $25,000. But even that’s not to happen; the government maintains it will be introduced in tax year 2014-15.

Under the original $100,000 cap, you could potentially grow a $200,000 fund to $2 million by age 65. Under the next $50,000 cap, you could have grown it to $1.2 million. And under the new $25,000 cap, you could at best hope for $700,000. (Calculations are in today’s dollars and assume a balance of $200,000 at age 50 and a moderate real return of 4.8 per cent for 15 years.)

Hope for the best

If a $50,000 annual limit is reinstated for funds under $500,000 in July 2014, calculations of the move will have reduced balances about $50,000 by age 65. If it’s not, the figure is a frightening $500,000 drop.

And that’s the reality for anyone with a balance already over $500,000, for whom the $50,000 annual limit will soon permanently fall 50 per cent.

The retirement prospects for many just got a lot bleaker. Women could also be hit hardest because their savings often lag due to time off to raise children (and we typically have a smaller pot to cover a longer life).

Don’t forget the penalties for exceeding the increasingly stringent limits, soon to be for everybody a pre-tax $25,000, including the superannuation guarantee for which employers are responsible, are harsh, too. They are under review but have been as much as 93 per cent of excess contributions.

All fifty somethings will need to review what they pay in and possibly look at tax-effective alternatives such as negative gearing and insurance bonds.

Act early

To secure an annual income of $56,000 to $70,000 - the Association of Superannuation Funds of Australia says the former figure buys you a comfortable lifestyle, though without travel, health costs or support to family (or home loan repayments) - a couple needs a lump sum of $700,000 to $1.75 million.

Taking the often-touted $1 million figure as the mid-range, the average person with the average fund would need to start paying in the maximum $25,000 every year from about age 35 (in today’s dollars, with a start balance of $50,000 and a real return of 4.8 per cent for 25 years).

Sure, employers contribute the mandatory 9 per cent - and that will be 12 per cent by 2020 - but for how many of us does that even come close?

For everyone, it’s time for a whole new approach to super.