Five things you need to know about your super
For many Australians, superannuation is the single largest asset they have, and yet it's also the first to be forgotten about entirely.
After all, why would you bother fussing with money you can't touch and that you won't be able to for years to come? While this is the reason so many people aren't engaged with the superannuation system, it is also its greatest strength.
The fact that your savings compound over a lifetime means the steps you take today will make an enormous difference by the time you retire, whether that day is four or 40 years away.
Luckily, there are really just five big things you need to get right.
It ultimately doesn't matter how well your investments perform if your fund's fees are gobbling up the returns anyway. Those charged to members usually include management, investment, and advice fees.
Collectively, they threaten to drain thousands of dollars from your balance every single year. With that money missing from your account and unable to compound over time, high fees could eventually bleed hundreds of thousands of dollars from your balance over a working life.
However, more than one in two Australians don't know how much they're forking out each year, according to a recent Superhero survey.
It is crucial then that you check your statement from the last financial year to see what you're being charged. The average default super product charges around 1% in fees, according to Rainmaker Information, which publishes Money magazine, so if you're paying above that you should question why.
Similarly how much your super is growing year-on-year matters. For reference, the difference in returns between the best and worst growth funds last year was around 10%. Compounded over a lifetime, a dud fund could seriously threaten the quality of your twilight years.
Take a $100,000 super balance for example. Over a 10- year period and with no further contributions, 5% annual growth turns that balance into almost $170,000. With a 10% annual return, it becomes $260,000, a difference of $90,000. Given more time or a greater balance, the difference only widens.
When comparing your fund against others though, it's important you compare like-for-like. This means if you're in a balanced fund there's not much point comparing your annual performance to a high-growth fund.
That's because the returns of different investment products are generally linked to their risks, which takes us to our next point.
Your age will typically determine what kind of superannuation product is suitable for you. Yet despite it determining your risk and return, Superhero found that as many as one in six Australians don't even know which superannuation option they are in.
If you're a 20-year-old with a long investment horizon then you may have a higher risk tolerance and a greater appetite for growth.
Conversely, if you're approaching preservation age, you're far more likely to be conservative in your approach, opting to protect your nest egg rather than grow it quickly.
Some funds will even let you choose your own allocations, allowing you to find the right investment balance for you.
The important thing is you find the investment mix with which you're comfortable. At the end of the day, it is your money. You should decide how it is invested.
Australian employees automatically have 10% of their wages invested for their retirement under the superannuation guarantee.
It is important to consider whether this will be enough or whether you'd like to make your own voluntary contributions to give your super a shot in the arm.
Choosing to do the latter has some advantages. If you set up a salary sacrificing arrangement with your employer, for example, any extra you contribute will only be taxed at 15%, instead of your income tax bracket - 32.5% for most Australians.
Not only can topping up your super help lower your tax bill each year but the extra contributions can grow significantly over the years, without making a noticeable difference in your regular paycheck.
Just be mindful that you cannot make more than $27,500 in concessional contributions per financial year or you'll risk being penalised by the ATO.
Of course, everyone's financial journey is different. If you plan on retiring early in your 50s for example, you may decide that you'd rather build wealth outside of super. It's all about considering your own goals and your own circumstances.
It's easy to forget, but most Australians hold insurance inside their superannuation fund, typically being life cover, total permanent disability (TPD) insurance and income protection.
These don't come free, with premiums generally deducted each and every month from your balance.
Again, it's worth considering whether you require all or some of these depending on whether you already have insurance coverage and the needs of you and your family.
To help make that decision, acquaint yourself with the policies themselves, what they cover, what the eligibility criteria are, and in what scenarios would they benefit you.
Super can sometimes feel overwhelming but reviewing and comparing these five things - and potentially switching funds - may only take an hour or two of your time.
Yet making the right choices now will not only improve your quality of life in retirement but could even help you get there years earlier. There's no better investment than that.
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