This article is the first of a 4-part series by Emma Brooke on superannuation through the generations. This first article explains where super comes from, how it grows, how much might be needed to retire on in 40 years’ time and ways to achieve it.

Superannuation is for the oldies, right? In some ways that’s true, but even in your twenties there are good reasons to take a bit more interest in your super. The average 25-year-old has around $10,000 in super, but the decisions you make now, even with relatively small sums of money, could earn you hundreds of thousands of extra dollars over your working life.

Are you getting any?

Earn more than $450 in any given month (excluding overtime, bonuses and some allowances)? Then every three months your employer should be paying 9.5% of that into your super fund. Usually you can choose your fund; if you don’t, it gets paid into a super fund of your employer’s choice. But that doesn’t mean you don’t get a say in how it’s invested.

If you don’t know if your super is being paid, or the fund it’s being paid into, ask your employer. If you think you’re missing out, search ‘unpaid super’ on the tax office website (ato.gov.au) to see what you can do. This is your money.

Where have you got it?

Had more than one job? If you have a lot of little super accounts the money can disappear in a puff of fees and insurance premiums. Simple fix - combine your super into one account.

What about insurance?

If you don’t have any dependents, your super fund could be paying for insurance you don’t really need just yet. Cancelling unnecessary life insurance leaves more money in your account to boost your savings. On the other hand, if you do need life or disability insurance, then doing it through super could be a better option.

Is it working for YOU?

Your money is going to be stuck in super for a long time, so you want it to be working hard for you. Most funds offer a range of investment choices and some will do better than others.

Imagine your income and super contributions follow a particular pattern over the next 42 years[i]. Your fund earns 5% per year, and when you retire it is worth $1,037,154. Now change just one thing – you choose an investment option that earns 8% each year. Now your balance could grow to over $2,000,000! That’s nearly a million bucks extra, just for ticking a different box on your super fund application form!

There’s a bit more to it. An investment choice that is expected to produce higher returns over the long term can bounce up and down in value. Some years it may even go backwards in value. However, “safer” investment options usually produce lower long-term returns.

What do you want?

Buying a new car. Travelling, Having fun. Let’s face it, there are lots more exciting things to do with your money than sticking it into super. The choice is yours but think about this:

• If Mum and Dad retired this year, they would need a minimum of around $59,200 per year to enjoy themselves[ii]. If that doesn’t sound like much now, by the time YOU retire inflation could have pushed that annual amount to around $204,800[iii]. That means you will need to have at least $3.5 million[iv] in savings! Sure you’ve got 40-plus years but that’s still a lot of money to save up! It can be done if you start early enough – and you don’t need to miss out on enjoying life now.
• Fact: you’re going to live much longer than your parents and grandparents. Can you imagine living another 30 years without earning an income? A sound investment plan designed to make your super work hard while you’re employed will be the difference between enjoying those decades and scraping by on a measly pension.
• Starting early and adding a bit extra when you can makes a big difference. Let’s work on another 40 years before you can retire. If you start now by making an extra pre-tax contribution of just 1% of your annual income to super, ($350 from a $35,000 salary – and the government could add to that with a co-contribution[v]) at an 8% investment return could add an extra $149,000 to your retirement fund. If you wait 20 years before starting to make that extra contribution, you’ll only get a boost of $49,000. $100,000 less! Continuing this small extra contribution as your salary increases will turbo boost your super fund balance. Imagine your retirement party?!

So, still find super boring? That’s okay; you’re not alone. But instead of finding the time to organise all this yourself, contact a licensed financial adviser who will review your current super, any insurance required, the investment choices and prepare a strategy to get your super into shape – then you can get back to enjoying life!

[i] Starting salary $50,000 pa increasing at 4% pa over 42 years. Super contributions fixed at 9.5% of salary and taxed at 15%. Investment returns before inflation but after tax and fees.

[ii] Income required to provide a couple with a “comfortable” level of income as calculated by The Association of Superannuation Funds of Australia (ASFA) (December 2015)

[iii] Value of $59,200 today in 42 years at 3% inflation.

[iv] Sum required to fund an annual income of $204,800 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.

[v] The government makes a co-contribution to super for low income earners under $36,021pa (2016/17).