Federal Budget: What about me?

Retirees and people actively planning for their retirement may be forgiven for thinking that they have missed out.  That there is little in this year’s Budget to benefit them personally.  But scratch beneath the surface, and we see that retirees may actually benefit most.

Take a step back

The Budget contains over $200 billion of stimulus measures in what will amount to a private sector led economic recovery.  The spending will primarily focus on tax cuts and employment subsidies.

This may not seem like it, but this is good news for retirees.  The fiscal stimulus will take the pressure off monetary policy and the low interest rate environment that makes it impossible for most people to live off their retirement income.  It means that there are unlikely to be any further interest rate cuts.

I want my share

The tax cuts also provide an opportunity for pre-retirees to fast-track their retirement plans.  People earning more than $37,000 a year will enjoy tax cuts backdated to 1 July this year.  Those earning $120,000 a year will benefit most; to the tune of $2,745 after tax in a year.

The government is hoping we will spend this to stimulate the economic recovery.  But pre-retirees would be wise to save this money by boosting their super balance or reducing any money outstanding on their mortgage.

Pre-retirees can double down on the tax savings.  If a pre-retiree earning $120,000 chooses to salary sacrifice their tax saving, it would mean redirecting around $4,200 of pre-tax income to super.  This would boost their super savings by over $3,500 per year.  That’s an immediate return of about 30% and it could make a meaningful difference to your retirement.

See the little people

But it’s the structural changes to the super system that will likely benefit retirees most.  The changes will increase competition between funds, improve transparency and ultimately lead to a more efficient and simpler super system.

Currently there is a lot of inefficiency and waste in the super industry.  The fact that new super accounts are often automatically created when you change jobs has resulted in about 4.5 million people having unintended multiple accounts.  That’s costing them about $450 million in unnecessary fees, which amounts to about $50,000 each of lost investment earnings.

This Budget will put an end to that.  From next year, when you change jobs your new employer will ask you where your super is and pay into it.  Just like they ask your bank account details.

And it will be easier than ever to identify whether you’re in a dud super fund.  A new annual benchmarking test will mean there’s nowhere for your super fund to hide.

Sometimes I wish for more

What’s clear is that there’s plenty in this year’s Budget for retirees and pre-retirees.  The changes will put less pressure on interest rates, provide a platform to fast-track your retirement savings, and make it easier to find a good performing super fund.

If you’d like to learn more about your opportunities and how to make the most of them, give us a call.  We’d love to help.

Daniel Crump is the founder of Daniel Crump Financial Planning.  This article is general and does not consider your personal circumstances.  If you would like advice specific to you, give us a call.