Regardless of their age, people should consider some simple strategies to help maximise their superannuation balance for when they retire, says Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.

“While there are superannuation strategies that work across all age groups, there are some that are better suited to people at a particular age or stage in their life.

“Even people in their 20s, who may think they are too young to think about retirement and superannuation, could benefit from a few basic steps that aren’t going to be as suitable or relevant as they grow older.

“Unfortunately it is no longer possible to leave retirement planning until your 50s or 60s – the limits on how much can be contributed each year mean that people need to start maximising their superannuation contributions much earlier in life if they want to save enough to ensure a comfortable retirement,” Mr Philpot said.

20 year olds

Those in their 20s should be seeking the maximise the growth potential of their superannuation over the long term by ensuring it is invested in growth or high-growth investment options.

“This age group can afford to ride out short-term market volatility and take advantage of the fact that over time – particular a thirty or forty year period – the overall trend of markets is almost inevitably upwards,” Mr Philpot said.

Another consideration for those in this age group is to avoid setting up new superannuation accounts when changing jobs.

“This is a life stage where people are likely to have three or four different jobs, which can inadvertently result in them having three or four different superannuation accounts.

“Keeping super in one place can make a significant difference to the final balance at retirement, due to minimising the level of fees and being able to track and manage one account rather than multiple accounts.”

30 year olds

People in their 30s should also be investing in growth or high-growth options as they too have time on their side to ride out market volatility, Mr Philpot said.

“In addition, this is an age where people may now have a young family, so anyone with dependents should consider appropriate life insurance within superannuation, which is a very tax-effective way to hold such insurance.

“It may also be worthwhile looking at spousal contributions if one partner earns less than $13,800 a year.”

40 year olds

This age group should also ensure they have appropriate insurances in place to meet their family’s needs.

In addition, they may be in a position to consider strategies such as salary sacrifice to build up their superannuation balance.

“Many people in their forties are starting to reach the peak of their earning capacity, particularly if they have already made good headway on paying off the mortgage,” Mr Philpot said.

“It’s therefore a good time to start thinking about using salary sacrifice to boost their concessional contributions up to their $30,000 annul limit.

“As a rule of thumb, this is a worthwhile strategy if their salary level is over $100,000 and the home mortgage is less than 50 percent of the property’s value.”

50 to 65 year olds

This is the age when most people start to get serious about their superannuation, and as long as they have taken the right steps earlier in life, they should be in a good position to ensure a comfortable retirement, says Mr Philpot.

“Now is the time for people to begin thinking about what kind of income level they want in retirement, and checking whether their superannuation is on track to meet this income retirement.

“Generally speaking, a sustainable annual income should be no more than five percent of the superannuation balance.

“It’s also time to focus on maximising contributions, taking advantage of concessional contribution limits as much as possible. They can’t be carried forward into future years so if they aren’t used, they are lost.

“Also, plan non-concessional contributions to get large amounts into superannuation before age 65. Up to this age, people can ‘bring forward’ up to three years of non-concessional contributions and contribute up to $540,000 in one financial year. This can be useful for those who, for example, sell their business as part of their retirement planning.

“Last but not least, from age 60 consider ‘transition to retirement’ strategies. This means transitioning super to pension phase, with the result that any income earned on superannuation assets becomes tax-free. The pension drawn is also tax-free after the age of 60 and can be re-contributed,” Mr Philpot said.

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Jonathan Philpot

With residential property prices in Sydney on a seemingly endless upwards trajectory, many investors feel they need to enter the market now, or else risk being left in the cold. But there are a number of issues that need to be considered before investing in residential property, according to Jonathan Philpot, partner, wealth management, HLB Mann Judd Sydney.

“With interest rates at historical lows, and showing no signs of rising anytime soon, there is a perception that now is a good time to buy property as low rates make housing more affordable,” Mr Philpot said.

“But Sydney property is not affordable by global standards. A common way of measuring affordability is to compare median house prices to household income. By this measure, house price affordability in the US and UK is sitting at 3.6 and 4.7 respectively. In Australia, it is at 6.4 and in Sydney it is at 9.8. By this measure, Sydney is one of the most expensive cities in the world and for first home buyers a much tougher market to enter than other Australian capital cities or regional areas.

“It won’t surprise house hunters to learn that the Sydney median house price has increased 14.5 per cent for the year to 30 April 2015. But the wisdom of investing in a property in Sydney needs to be considered from the point of view of income as well as capital growth.

“With a net yield of less than 2 per cent for many properties in Sydney, from a price/earnings (PE) perspective Sydney property is sitting at 50 or above. This is far higher than the Australian share market PE of 15.

“Of course, property investors do not have to experience the daily volatility of shares, and from an investor’s view, the tangible benefits of being able to see your property and make ‘DIY’ improvements will often increase the preference for property.

“Equally, most people are invested in property for the long term, so are unconcerned about a property correction over the next few years. But what about the next 10 years?” Mr Philpot asked.

“Our long term view on the Australian share market is very good. With low interest rates and very good dividend yield of close to 6 per cent including franking credits, we forecast a 10% return for Australian shares over 10 years.

“Our 10 year number for Sydney residential property sits at half the Australian share market expected return, at only 5 per cent.  This is mostly due to the low net yield of about 2 per cent and the logic that if a market has already experienced strong growth, this typically suggests that the next period of growth will not be as strong.

“It is impossible to call the end of any bubble, but certainly investors who already have Sydney investment properties should consider whether their wealth has appropriate diversification before purchasing further in Sydney.

“Two investment properties and a handful of Telstra and bank shares do not make a diversified investment portfolio,” he said.

Mr Philpot also expressed caution about the trend for young investors to gear up self managed super funds with investments in Sydney property.

“Negative gearing is more effective the higher the tax rate payable. For this reason it is a popular strategy for those on the highest marginal tax rate. Superannuation, with its concessional tax rate of 15 per cent, is below most of the individual tax rates. It will usually provide less of a tax benefit, compared to simply negative gearing into a property personally, outside of the superannuation environment.”

Another consideration is whether the geared property is the only investment within the SMSF, Mr Philpot said.

“With the loan repayments taking up all of the contributions and rental income for the length of the loan period, it could lead to a very poor return and a low super balance at retirement for those that adopt this aggressive strategy, as opposed to just leaving their super in an industry or retail fund.

“Rising interest rates pose another risk for this strategy. If interest rates were to rise a couple of percentage points, cash flow may become a problem because of the limited concessional contribution levels.  This may result in having to make additional superannuation contributions that do not receive a tax benefit (called non-concessional contributions), in order to meet the repayments on the loan within the SMSF, a strategy that will most likely divert money away from the home mortgage.”

House price affordability information from AMP Capital. Sydney house price increases from RP Data.

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