What the federal budget means for retirees

What the federal budget means for retirees

With our compulsory super contributions happening in the background, many of us may not give much thought into placing extra dollars into our savings accounts for retirement. In fact, only 22 percent of single people are on track to achieve a comfortable level of retirement income, according to a Melbourne Institute study ‘Measuring Adequacy of Retirement Savings’. 

But news from the 2014 federal budget might actually force you to consider planning for retirement a lot sooner, and make you change the way you treat that savings account. By familiarising yourself with the budget and its various provisions, you can better plan for your financial future.

Retirement age rising

Perhaps the most notable part of the recent budget is that it raises the pension age from the current 65 years to 70 by July 1 2035. This builds on the previous government’s initiative to raise the pension age to 67 by July 1 2023, although neither of these plans will affect those born before July 1 1958.

Once this change is in action, you won’t be able to access your pension until that age – meaning you might have to find alternative funds to fuel your lifestyle if you choose to retire early.

But a higher retirement age also means being prepared to work for a longer period of your life than you may have expected. This highlights the importance of careful saving – and the need to have a savings fund you can draw on in case of illness or injury later in life that may limit your ability to work. So it may be a good idea to get that savings account calculator out now and crunch the numbers.

The issue of older workers and a higher pension age was highlighted by the Association of Superannuation Funds of Australia CEO Pauline Vamos.

“Importantly, the health status of older workers needs to be taken into account as many people reaching their late 60s and early 70s are either unable to work at all, or can no longer perform the roles they have been working in, due to physical or mental health-related concerns,” she said in a statement.

This once more underlines for seniors and future seniors the need to plan and to save carefully. Whether it’s jet-setting abroad, staying at home to babysit the grandkids or settling into a quiet home, it may be wise to plan to have too much in the bank than too little. 

Changes coming to Australian seniors

On top of pension changes, recent data from the Australian Bureau of Statistics shows that Australians are living longer than ever. A male born between 2010 and 2012 is forecast to live to 79.9 years on average, while a female born in the same period is predicted to live to 84.3 years.

With a longer life expectancy comes a longer retirement period. This means that, both current and future seniors will need to consider prudent financial planning to ensure they have a comfortable retirement.

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Learn more about savings accounts

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.