Generation X: Your guide to super

PORTFOLIO POINT: Are you a 30- or 40-something? Want to know how to maximise your super during “your most powerful decade”? Today starts a two-part series on super for Generation Xers.

I hope it’s not too much of a shock to some readers, but I’m only 40 years old. I managed to reach that milestone last December, with no consideration given to the purchase of a sports car. Or any other such flight of fancy that would suggest that I had some fear about becoming “middle aged”.

I’ll remember a few things about the party itself. Well, to be honest, probably not much really. But I will remember a happy birthday email I got from a Eureka Report reader a few weeks before. “Sue” and I have been emailing for more than a year.

In her email, Sue said something I’ll never forget: “You are now entering your most powerful decade, so make the most of it.”

She’s right. I already knew this, because I wrote a book on exactly this topic (Debt Man Walking) and about how Gen Xers, those born in the 60s and 70s, need to make the most of the time prior to turning 50 to set themselves up for the rest of their life. But for some reason, possibly just because Sue is such a lovely Eureka reader, it stuck with me.

Your 40s is the decade where you “make it”. The rewards might not come until later, but that’s the time when you need to sow the financial seeds. Census statistics show that the highest average salaries are earned by those between the age of 45 and 50. After that, average salaries slide (even if many people continue to increase their salaries).

So it is starting then (if you haven’t started previously) that will allow you to get the benefit of 20, 30 or 40 years of compounding that will make a huge difference to how comfortable your retirement is.

The problem is that there are some huge obstacles in the way. Expensive obstacles. The first is the monster mortgage that tends to be inevitable in one’s 40s. If it’s not the first house, it’s what you traded up to. The second are those expensive little things called kids, that don’t produce any income. My nearly four-year-old Ned is yet to play his first professional golf tournament with his proud Dad as caddy, so I’m a little worried he’s starting behind Tiger Woods.

Over this week and next (unless something earth shattering happens on the superannuation news front), I’m going to cover off on the essentials for Generation X and their super funds. There are so many things that can be done earlier rather than later that can have a huge impact on your superannuation pot. Simply understanding the basics is a starting point …

Super for the … under 47s?

If you were born after June 30, 1964, you are currently no older than 46 – my side of 50. I’m going to use that date as a cut-off for this series for a couple of reasons.

The first is that it’s an important date in superannuation terms. If you were born after June 30, 1964, you will not be able to access your superannuation until you are 60 years old.

(If you were born before that, see the following table)

Table 1: Preservation age by birthdate

What could be simpler?

If you are a post June 30, 1964, child, then you have a minimum of 13 years before you can even begin to access your superannuation. If you’re currently 35, you have 25 years before you can gain access to super. And that means that super is still an ultra-long-term investment for you. And it’s not like you hit that magical 60 mark and just withdraw all of your superannuation anyway. It’s designed to then become an income stream, that you may well live on for another 20, 30 or 40 years.

The most important thing to realise is that at this age, you don’t need to concern yourself too much with “preservation age”, “pensions”, “retirement”, etc. They are so far away that the government could potentially change the rules anyway.

Superannuation at this stage of your life is far simpler. It’s predominantly about investment and contribution strategies.

Investment strategies: Have your super assets working hard for you

However, as you won’t be able to touch it, having a good understanding of asset classes and how much you should have where becomes vitally important. The fact is that if you’ve never really looked at your superannuation account, there’s a very good chance that you’re sitting in a “balanced fund”. Or perhaps many balanced funds. Balanced funds tend to be approximately a 60/40 split between growth assets (shares and property) and income assets (cash and fixed interest), although the growth portion of a balanced fund could be as little as 50% or as much as 75%.

If you’re of the belief that property and shares hold better long-term growth prospects – which history suggests is correct – then you should consider increasing your exposure to shares and property in your superannuation. As a rough rule of thumb, the younger you are, the more of your assets should be in shares and property. If your super fund gives you something more aggressive than just a 60% allocation to shares and property, then consider taking that option. (If your fund doesn’t offer you anything other than a balanced option, then be on the lookout for a new fund, or platform.)

(That doesn’t mean that you can’t actively manage your assets. If at any stage you believe that shares and property markets have run too hard, then you can reduce your exposure to certain assets.)

Most super fund platforms – whether they’re industry, corporate, government or retail funds – will give you some flexibility in what sort of investments you’re in. The names might be a little confusing. For example, their balanced fund might be called something completely different. Your first step should be to call your super fund and ask them what the breakdown of assets is in the fund.

Also, do a risk profile of yourself. There’s a very basic one at the top right-hand corner of my website (www.debtman.com.au) that will help give you a rough indication of your risk profile.

My argument with Gen Xers who aren’t necessarily going to actively manage their super is to go one step further on the risk profile than they come out naturally. If you are “balanced”, then set your asset allocation towards “growth”. If you are naturally a “growth” investor, consider becoming a “high growth” investor, or somewhere in between the two.

It is your allocation to growth assets that is likely to have the biggest impact on how much you have there for retirement.

Concessional contributions (CC) limits – the dangers

One important thing to understand is “concessional contribution” limits. What are they?

Concessional contributions limits are those set by the government that determine how much you can put into super that is taxed at the relatively low rate of 15%. Anyone under the age of 50 now has a concessional contribution limit of $25,000.

It is considered “concessionally” taxed because if you were to take it as salary, you would be taxed up to 46.5% (if you earn more than $180,000 a year). If you put it into super, or salary sacrifice it into super, you will only be taxed at 15% on the way into the super fund.

What’s counts towards your CC limit is, roughly, the 9% Superannuation Guarantee contributions that are paid by your employer and any salary sacrifice payments you opt to make to super. Also, if you’re self employed, tax-deductible contributions made on behalf of yourself to a super fund.

It’s important to know about this limit, because it was cut in half by the Rudd Government. Previous generations have been able to pump in up to $100,000 a year. Traditionally, Australians have pumped money into super when they were over 50, the kids were off their hands the mortgage was largely paid off.

Gen Xers won’t be able to do that to the same extent. It absolutelys mean that we (Gen Xers) will have to start contributing to super earlier than previous generations, because of the restrictions of getting money into super.

The problem is that most Gen Xers do have those monster financial issues of kids and mortgages to contend with. The self-employed have a further issue to contend with – they don’t have to contribute to super on their own behalf (depending on how they pay themselves.

But as you won’t be able to dump money into super later, it is going to become imperative that Gen Xers start putting money into super at an earlier age. That is, they’re going to have to make some sacrifices (salary sacrifice) into super through their 40s, rather than just in their 50s.

The main advantage to this that you will get compound growth on that money from an earlier age – that is, you’ll be able to have more money working in super for a longer period.

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In the second part of this series, we’ll go into the traps for young players, insurance inside your super fund, when to start considering a SMSF, what’s changed between 10 years ago and now and gearing in super.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.