With so many enticing ways to spend their cash, it's not surprising that most twentysomethings give little thought to saving for their retirement. And we can hardly blame them. After all, their baby-boomer parents spent money at an unprecedented rate. But the post-war generation is starting to realise that retirement could be less comfortable than expected, and their children would be wise to learn from their mistakes.

At first glance, the introduction of the superannuation guarantee (SG), through which employers currently contribute 8 per cent of an employee's salary into a super fund, suggests young people will achieve a better retirement income than previous generations. The SG is scheduled to rise to 9 per cent next year. But research by the Association of Superannuation Funds of Australia (ASFA) indicates this compulsory saving won't meet our expectations of an adequate retirement income. In a report released last December, ASFA calculated that for a person on average weekly earnings (about $35,000 a year), a 9 per cent SG contribution made over 30 years would result in a retirement income of about $19,000 per annum in today's dollars. This includes the payment of an age pension. It's not enough to live on, according to a recent poll that found only 4 per cent of respondents believed less than $20,000 a year would be adequate for retirement.

So additional super contributions will be necessary. But at what age should you start making them? The sooner, the better, according to Susan Orchard, superannuation technical consultant to the Institute of Chartered Accountants in Australia (ICAA).

"The best time to start is as early as possible, because of the compound interest you'll accrue," she says. "It's better to make small, consistent payments than big lump sums at the end, because you're less likely to be hit with the superannuation surcharge."

Delaying super contributions is costly: ASFA estimates that shortening the period of contributions by even five years means you'll have to pay out 3 per cent more of your salary a year into a fund. It can also be tax effective for those paying the higher income tax rate of 48.5 per cent to sacrifice part of their salary to super, as the contributions come out of their pre-tax income.

Realistically, though, many people find paying a mortgage and supporting a family leaves little spare cash for super. And if one partner has taken time off work to care for children, keeping his or her super fund topped up with after-tax contributions can be difficult.

This is why Iain Reid, manager of technical services for AMP, believes boosting super contributions early in your working life isn't always such a good idea. "In the early years it's just as important to feed money into the mortgage. Your working life might span 30 to 40 years, so there's plenty of time left to put money into superannuation."

Angela Whitbread, financial planner with Whitbread Financial Services, agrees. "You should look at clearing your non-deductible debt," she says. "Pay off your mortgage first - generally in your 30s and 40s - and then look at super. With a mortgage you're paying off debt with after-tax dollars, so you'd want to extinguish that as soon as possible because there's no tax benefit in it. It's not working for you."

If only the baby boomers had followed such a prudent investment strategy. Although average retirement payouts are expected to increase from $62,000 today to $135,000 in June 2020, this gives an annual income of a mere $7000 a year over a retirement period of 20 years. Earnings from other assets should supplement this figure but there is little doubt that demand for the age pension will increase.

"The baby boomers are so far off being prepared for their retirement that it's quite disturbing," says Tim Elstoft, financial planning consultant for London Partners Vic.

And Ms Whitbread says it's often people in the middle-income range, earning $30,000 to $50,000 a year, who are in the most precarious position. "On the whole, it's people earning the average income who are not adequately prepared. They're thinking they will rely on social security but we have to ask whether that will still be available and how, as a society, we're going to support it."

Fortunately there is still time for most people to maximise their retirement income. While super is often the preferred long-term investment for retirement, property and share portfolios can offer an important income stream. A gearing strategy, where money is borrowed to buy investments such as shares, might also be worth considering, says Mr Reid. "It's a five to 10-year exercise but it's not something to enter into lightly - it can magnify the gains (on shares) but can also magnify the losses." Mr Reid also believes it is important to consider the way in which super fund members access their money when they retire. Withdrawing super as a lump sum is generally considered to be the least tax-effective strategy for people with an account balance greater than $200,000 because of the 15 per cent exit tax on deposits made after 1983.

Instead, members can negotiate an "allocated pension", in which a regular income attracts a 15 per cent tax rebate. Any income from investments in the fund is tax free.

Both Mr Reid and Mr Elstoft say an allocated pension is a particularly tax-effective way of arranging retirement finances.

"As far as I'm concerned, it should be compulsory for people to consider it," Mr Elstoft adds. Ultimately, though, younger people and those approaching retirement have to consider the kind of lifestyle they want in retirement, and whether these expectations can be met by the super contributions they are making and the assets they have accumulated.

"To a certain extent, people are better prepared than they have been in previous generations," says Ms Orchard.

"But their expectations are disproportionate in relation to the income level they have funded so far. So it's a question of what can you change in order that your expectations of retirement are met."

Lump sum v. pension

Should I take a lump sum or pension?
Withdrawing super as a lump sum is seen as the least tax-effective strategy for individuals who have a super balance greater than $200,000 because the government imposes a tax on lump-sum withdrawals. Any super contributions made before 1983 are added to your taxable income and are subject to 5 per cent tax. Any contributions made after 1983 are taxed at 15 per cent (excluding the first $105,843). Often an allocated pension is the best way to avoid a hefty tax bill.

What is an allocated pension?
Rather than taking a lump sum, an allocated pension allows you to draw a regular income from your super investment portfolio. Any income or capital growth from the investments is tax free. It's part of the government's plan to encourage people to keep their money in a super fund, rather than withdraw it all at once and possibly fritter it away.

How much can I withdraw every year?
The government sets a minimum level of income paid to the individual, which is determined by age and account balance. The allocated pension is treated like a salary income - which is taxable - but the government offers a 15 per cent tax rebate as a further incentive.

Super stats

• Official projections by the Australian Bureau of Statistics indicate that the population aged 65 years and over will rise rapidly over the next 40 to 50 years, both in absolute numbers and as a percentage of the total population. The age group rises in number from 2.3 million in 1999 to about 4.2 million in 2021 to reach a massive 6.5 million by 2051. As a proportion of the population this represents an increase from 12 per cent in 1999 to 19 per cent in 2021 to 25 per cent in 2051.
• The number of those aged over 85 is expected to double within 20 years, reaching 480,000 in 2021. By 2051 the group is projected to reach 1.3 million, about 5 per cent of the population, compared to only 1.3 per cent now.
• According to a recent poll by Wirthlin Australasia, about seven in 10 baby boomers estimate they'll need $30,000 or more a year in retirement.
• The family home is the biggest asset of most Australians. Super represents about 19 per cent of the average person's assets.