The simple change that could leave you 35% richer in retirement

Superannuation remains one of the most tax-effective ways Australians can build long-term wealth. But while many people focus on contribution limits and tax changes, the biggest determinant of their retirement balance may be something far simpler: how their super is invested.

A seemingly modest 1% increase in annual returns could leave an Australian with a super balance that's 35% larger over 30 years.

Why super remains a powerful wealth-building tool

Superannuation has had many rule changes over the years, most recently being higher taxes for super balances above $3 million set to apply from July 1, 2027.

But for most Australians, super remains a highly tax-effective structure for building wealth during their working years and, once retired, can provide a tax-free income stream.

This is why I often tell clients to maximise the earnings of their superannuation during working years, in order to increase their final superannuation balance upon retirement.

The annual tax saving for those who have maximised super balances compared to those who may choose to invest their wealth in their own name or through a company or a family trust could exceed a million dollars over all your retirement years.

The two super decisions you can control

There are only two levers that you can really control with your super.

The first is whether to put additional contributions above the 12% employer-guaranteed contribution, and the second is broadly how your money is invested within it.

Most Australians never review this super setting

Yet many Australians do neither.

They don't make additional contributions and often stay in their fund's default option for decades without reviewing whether it suits their goals or retirement timeframe.

I think this largely comes down to education.

Could your default super option be holding you back?

A "Balanced" option will look different with every superannuation fund, but they will be around 70% in 'growth' assets, being Australian and international shares, property and infrastructure and about 30% in 'defensive' assets, being mostly fixed interest and cash investments.

Typically, this is the type of asset allocation we see from those who are currently retired and drawing a pension to live from - in this case, having 30% in defensive assets makes sense.

But what investment option is right for you often comes down to a blend between your investment horizon and your overall risk tolerance.

How a 1% higher return could boost your retirement savings

Let's explore a 'High Growth' option as an example.

This could look like an allocation of 90% in growth assets and 10% in defensive assets.

For this, you would expect a higher return over a 10-year period - potentially around 1% per annum, based on a historic equity risk premium that shares will deliver a higher return than a risk-free investment of about 5% per annum, to compensate for the risk or volatility of returns that shares will produce.

Therefore, each additional 10% allocation to 'growth' assets should provide an overall 0.5% increase in the expected return.

Of course, the investment world is not as simple as the above and there will be long periods of time when the equity risk premium does not deliver higher returns than safer defensive assets, but we do know the longer the investment period, the greater the chance of shares delivering a substantially higher return.

So what is the impact on your super balance of an additional 1% per annum return?

Over 20 years it is an additional 22% higher super balance and over 30 years it is an additional 35% higher balance, assuming all other factors are equal.

This is the magic of compounding; a seemingly small higher expected return produces a significant final difference to the outcome over 20-plus years.

Could a high-growth option be right for you?

Should we all now go out and change our investment option to the most aggressive investment option?

This requires expert guidance that provides a clear picture of your personal circumstances and how much you should be aiming to build up into super to ensure you have a comfortable retirement.

However, as a general rule, if you are more than 10 years away from retirement, review your current investment option and consider whether a more aggressive option within super and perhaps lower your risk with investments outside of super is worth considering as part of your long-term retirement strategy.

The overlooked tax deduction that can boost your super

Finally, as some of the tax advantages associated with investing in property have been reduced, making additional concessional super contributions and claiming a personal tax deduction remains one of the most effective ways to lower taxable income while building retirement savings.

Particularly if your super balance is below $500,000, the amount you can claim as a tax deduction could be substantial and well worth receiving some advice on.

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