How do you catch up if you haven’t contributed to your superannuation for a while?
Perhaps you’re self-employed, have taken time off to start a family, or are just enjoying some time off work to travel the world. Whatever the reason, it’s likely that as a result, your superannuation might be a little light on. The question is does it matter if you miss a few years of contributing?
Over the years, I have met many self-employed people who find business conditions tough going. A lot of them would much prefer to plough money back into growing their business than squirrel it away in a superannuation fund. Many business owners consider their business as their nest egg, and hope this collateral will help ‘bridge the gap’ for their lack of super contributions at retirement.
But the question I ask self-employed business owners is, what if you don’t get the sale price you hoped for? Equally, with the high rate of disruption taking place in the market, will your business still exist? Is your industry headed for the next blockbuster trash pile? (Click here to view our latest article discussing this area of financial disruption).
Similarly, if you have taken time off to raise a family or spend time travelling the globe, you may also have hit the pause button on your super funds. Sometimes, this hiatus can be anything as long as 10 years. My son turned 8 years old two weeks ago, yet I still remember holding him as a newborn in hospital for the first time as though it was just last week. From time to time, I wonder where have these eight years gone? A decade flies by far too easily.
So let’s look at a quick example:
Suppose you are 35 years old with a $60,000 super balance, earning around $80,000 p.a. If you were to take, say, 10 years off from making super contributions, what impact would this have on your savings?
Don’t worry; I’ve done the maths for you. At retirement, your balance if you continued contributing would be $1,718,001. However, if you stopped contributing for 10 years, it would be $1,176,677. That’s a difference of over half a million dollars, or $541,324 to be precise. But if you translate that into today’s dollars, this would equate to $819,044, in other words, a difference of $258K. (Of course, there are heaps of assumptions; to view them, click here).
So how would you make up a shortfall of $541K? Well, here are a few strategies you could consider:
- Increase the level of salary sacrificed savings during the reminder of your working period.
- Increase the level of risk you are prepared to take on in the hope you might obtain a higher rate of return.
- Use leverage to buy an asset in the hope the higher rate of return could help offset the shortfall.
Each one of the variables has a direct impact on the outcome, and there is a different level of risk associated with each strategy. So you can see, it is crucial to understand the shortfall position you might face and develop a robust financial strategy to tackle this issue head on.
My 8-year-old son loves superheroes and recently we have been watching the latest TV series of ‘Supergirl’ on Apple TV. Sometimes, when you face financial issues, at first they can seem insurmountable; it’s as if you need special superpowers to sort them out. But in reality, all you need is a combination of time horizon and a well thought out strategy, so don’t despair… like Supergirl, you need to persevere and you will triumph!
Please also remember that before embarking on any investment decision, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.
(Photo by Darren Michaels//CBS via Getty Images)