Why getting started early on your super can pay huge dividends
With mortgages to repay and children to feed and educate, it is understandable that for many people, boosting their superannuation seems out of reach.
While the focus for several decades may be a roof over one’s head and a family’s wellbeing, it’s important to factor in how things might look in the future.
One of the biggest traps for younger people is to ignore the impact of higher savings over time. The sooner younger people put a super savings plan in place the greater the effect it will have on the final balance.
For anyone with a sizeable mortgage the focus will always be on paying down that non-deductible debt first, but there may be some room to steer part of salary towards super.
Everybody’s circumstances will be different but if you just go along thinking the superannuation guarantee will be enough to retire on and then get to 60 and discover it isn’t, you won’t have as much as if you’d planned to save more earlier.
Australian Superannuation Funds Association data shows that for someone on $60,000 a year who plans to retire at 60, 35 years of contributions at 9 per cent and investment earnings from age 25 will generate about $260,000 in today’s dollars.
If contributions started only at age 50 the amount of retirement savings would be only about $50,000.
Some forward planning calculations based on a couple in their early 40s with three children aged 13 to 18 were done. They could choose to continue their existing level of spending long after the youngest child turned 20 or could start salary sacrificing some of the money that they would have taken home to boost their superannuation.
Doing the former will mean a combined super balance at retirement of about $745,000, while the latter strategy would boost their retirement savings by $215,000 to $960,000.
Even sacrificing relatively small amounts of salary can have a significant impact and there is not a lot of difference to take-home pay as a result.
A starting point for younger people thinking about boosting their super is to work out what they’ve got.
Anyone who has worked several jobs in their 20s or 30s could easily end up with multiple accounts, all of which are having their balances reduced by fees.
If nothing else combining several accounts will tell you what you’ve got as a starting point.
According to the most recent Australian Bureau of Statistics publication on superannuation, in 2007 almost three-quarters of 15 to 24-year-olds had a superannuation balance between $1 and $9999, although almost 20 per cent didn’t know their balance.
One third of 25 to 34-year-olds had a balance up to $9999 and 28 per cent had a balance between $10,000 and $24,999.
Given one of the key issues to ensuring individuals have enough savings to retire on is saving early and taking full advantage of the power of compounding returns, key parts of the super industry have begun targeting the young via Facebook and Twitter.
Australian Institute of Superannuation Trustees chief executive Fiona Reynolds says social media may end up being the saviour for the super industry in terms of engaging with the young.
The government co-contribution, while now halved, is still a good way for people earning a total income of $46,920 or less (as at July 2012) to get a free kick to their super.
Where the government previously paid up to $1000 for every $1000 of pretax dollars contributed to superannuation, from July 1, 2012, the co-contribution is $500.
There is no age limit to the co-contribution and, while it may be less than it was, it is still a 50 per cent return on your money.
Parents with the cash flow could make the after-tax contribution on behalf of their children as well.
August 10, 2016
August 12, 2016
August 11, 2016
August 10, 2016