One of the many blessings that come from being born in Australia is the right (and obligation) to have a government-mandated retirement fund. Superannuation was made compulsory for most Australian workers in the 1990s by Paul Keating's government.
Since its establishment, superannuation has ballooned into one of the largest pension industries in the world. Today, it is worth a mind-boggling $4.2 trillion. That's significantly more than our national annual gross domestic product (GDP) of almost $1.8 trillion.
When it was first introduced, compulsory super required 3% of our pay packets to be diverted into our super funds. Today, that figure has risen to 11.5%, and will hit 12% on 1 July this year.
Superannuation is a complex topic, and many workers don't fully appreciate its inner workings, tax benefits and importance to a comfortable retirement. Yet, if managed properly and with diligence and respect, it's my belief that any working Australian, regardless of income, can set up their super for a comfortable retirement without a complete reliance on the Age Pension.
So with that in mind, here are three essential tips that I believe can help any Australian maximise the benefits from a superannuation fund.
Most Australians have their super invested in what's known as a 'balanced fund'. This might sound sensible, but it may not be the best option to go with for anyone under the age of 40, or even 50. All super funds invest your money into income-producing assets. These typically include ASX and international shares. As well as government bonds, cash and other assets. A balanced fund aims to balance growth assets like shares with 'safer' investments like cash and bonds.
This might help protect your portfolio from stock market ups and downs. However, it will also likely reduce your super fund's performance over long periods of time. If retirement is not something you're planning in the next ten years, then it might be a better idea to go for higher growth options, which exclude the safer investments like cash.
Even if a balanced fund returns 2% less per year on average over your working life compared to a growth fund, it can cost you tens, if not hundreds, of thousands of dollars in returns.
Contributing 11.5% (or 12%) of your salary over your lifetime into superannuation will be enough for most Australian workers to enjoy at least a modest retirement. But you can supercharge the process by contributing extra. Every worker is entitled to put additional funds into their super accounts (although this has limits). Doing so can provide you with a double benefit.
Firstly, each extra dollar you put into super will compound and produce more money over your working life that will benefit you in retirement. To illustrate, if a super fund returns an average of 8% per annum, each extra dollar a 20-year-old invests will be worth $24 by the time that person turns 60.
Of course, this enormous composing benefit reduces the longer you wait. But it is a powerful force you ignore at your peril.
Secondly, money invested in superannuation is normally taxed at a lower rate than money one earns outside super. As such, every extra dollar you contribute into super reduces your tax bill. Again, there are limits, though. So make sure you check with a financial adviser regarding your own situation.
As we've already flagged, superannuation funds harness the awesome effects of compound interest by investing your money into wealth-producing investments like ASX shares. Compounding works best when it is left alone to do its magic. As Warren Buffett's legendary partner Charlie Munger once said, "The first rule of compounding is to never interrupt it unnecessarily".
Yet, you might be tempted to interrupt it. A common 'interruption' is moving your super from shares into cash when there's a stock market crash. Australians were also given an opportunity to do this by withdrawing $10,000 in super during the COVID pandemic. Disregarding a genuine need to access the money, this is almost always a mistake. The above example works in reverse, too. For every dollar a 20-year-old took out of super in 2020 cost them $24 at age 60.
Super is there for retirement. Not your house deposit, nor a new jet ski.
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