Caregiving can have a retirement sting

National Carers Week runs from Sunday October 13 to Saturday October 19 this year, and aims to recognise, celebrate, and raise awareness about the 3 million Australians who provide care to relatives or friends in need of their support.

The need to provide support can arise at any time as a result of people needing to help others with a disability, a mental health condition, a chronic or terminal illness, or who are elderly.

In many ways, caregivers are unsung heroes. Their work is invaluable, but they are typically forced to forego paid employment and also miss out on precious compulsory superannuation payments that would otherwise have been paid by an employer.

As research by Vanguard shows, the financial cost of caregiving can be very costly over time and can have a significant impact on retirement savings balances.

There are a number of ways individuals can potentially lessen the long-term impact on their superannuation balance from having to stop work.

The cost of caregiving

We’ve estimated the potential impacts on individual superannuation retirement balances for those who need to provide unpaid caregiving.

The numbers represent the monetary effect of foregone compulsory Superannuation Guarantee (SG) contributions as a result of people taking 12 months of carers’ leave by comparing them to the estimated retirement balances of individuals who do not take any time out of the workforce.

They are in today’s dollars and adjusted for inflation, real wage growth, and rounded to the nearest 100 dollars. However, the numbers do not take into account the possible impact of career breaks on an individual’s’ actual wages growth over time or any additional superannuation contributions they may make at a later stage.

For a 25-year-old taking one year of carers’ leave (based on a median wage of $43,200), we’ve estimated their superannuation balance would potentially be $12,900 less at age 67 than someone of the same age who takes no carers’ leave during their career.

Using the same measures for a 35-year-old (based on them earning a median wage of $62,500), we’ve estimated their retirement balance would be $14,300 lower; and likewise, for a 45-year-old (based on a $65,600 median wage), we’ve estimated their retirement balance would be $11,500 lower than someone who didn’t take any carers’ leave.

The calculations are based on the 11.5% SG contributions rate in 2024-25, which rises to 12% from 2025-26, and assume investment returns of 6.5% per annum (including CPI growth of 2.5%); annual real wage of 1.2%; and a 15% tax on SG contributions.

Of course, the numbers would likely be substantially higher for people who need to take longer periods out of the workforce to provide caregiving.

We’ve undertaken additional calculations, using the same assumptions, based on individuals earning 50% less over a five-year period so they can be a part-time caregiver.

This would lead to a $26,100 retirement savings gap for a 25-year-old compared with someone the same age working full-time; a gap of $29,900 for a 35-year-old; and a gap of $24,300 for a 45-year-old.

Mitigating the financial impacts

There are a number of ways individuals can potentially lessen the long-term impact on their superannuation balance from having to stop work to provide caregiving on a temporary basis.

When full-time work is resumed, try to make personal concessional contributions (taxed at 15%) in addition to the compulsory SG contributions made by an employer. Even small extra amounts can make a big difference. For example, $20 per week adds up to more than $1,000 into super every year.

Individuals may also be eligible for the Federal Government’s automatic $500 annual superannuation co-contribution payment. For more information, check the Australian Tax Office’s website. When added to extra contributions, the co-contribution payment can significantly reduce the impact of taking carers leave.

Making concessional superannuation catch-up contributions down the track is another option. This can allow individuals with a total superannuation balance below $500,000 to take advantage of unused pre-tax contributions from previous financial years, on a five-year rolling basis.

Individuals can also make after-tax contributions into their superannuation in any financial year, perhaps using money from an inheritance or an asset sale. The current limit is $120,000 per financial year, however individuals can contribute up to $360,000 in one financial year under the three-year “bring forward rule”.

If you are a caregiver and unsure about your options or need some additional advice on how to protect and maximise your retirement savings over time, consider consulting a licensed financial adviser who can provide you with specific personalised advice.

General advice warning

Vanguard is the product issuer and the Operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270 is the trustee of Vanguard Super (ABN 27 923 449 966) and the issuer of Vanguard Super products. We have not taken your objectives, financial situation or needs into account when preparing this report so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs and the disclosure documents of any relevant Vanguard financial product before making any investment decision. Before you make any financial decision regarding a Vanguard financial product, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD of a Vanguard financial product before making any investment decisions. You can access our IDPS Guide, Product Disclosure Statements, Prospectus and TMD at vanguard.com. au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This report was prepared in good faith and we accept no liability for any errors or omissions.

Tony Kaye

16 OCT 2024
vanguard.com.au

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