Why it pays to top up your super now
Everyone should know that investing early for longer in a tax-advantaged, low-fee environment is hard to beat.
Yet it's not uncommon to hear friends or family expressing regret for not doing more to boost their super as they exit the workforce along with their salary.
Early in your working life, time is on your side when it comes to your super.
By planning ahead and making informed choices, you can take advantage of super's long timeframe, says Marianne Walker, Cbus Super's deputy chief executive and chief member officer.
"When you're in your 20s and 30s, retirement can seem like it's far away in the future. However, getting on top of it early can have a big impact on your lifestyle later in life," she says.
The importance of extra contributions
Making extra contributions and choosing the right investment play a key role.
"Young people, who have many years ahead of them until they can access their super, can generally afford to choose a higher-risk, higher-growth option as long as they are willing to hold on through the inevitable negative years that come along from time to time," says Walker.
Walker says it can be tempting to try to move your money to the safety of cash when markets are volatile.
"But, unfortunately, there's no clear signal when it's time to get back in and recoveries can happen very quickly.
Many people over the years have hurt their long-term outcomes by reacting to short-term volatility and then missing out on the positives that have followed.
"If you want to take advantage of your long timeframe, then you need to be invested for that long time to benefit."
Concessional vs non-concessional
Understanding the basics of superannuation is also important.
"Extra contributions into super can be before-tax or after-tax, or even a combination of the two. Before-tax contributions (concessional contributions) are taxed at 15% when they hit your fund instead of the income tax rates you'd pay on money if you kept it in your hand.
"There is no tax paid on after-tax contributions (non-concessional contributions) and these can make you eligible for the government super co-contribution, depending upon eligibility requirements."
Walker says people should be careful not to exceed any contribution limits and take account of the fact that the money is locked away until retirement.
"Remember, extra contributions to super are on top of the compulsory contributions your employer makes on your behalf. These contributions, the superannuation guarantee (SG), are currently 11.5% of your ordinary time earnings."
A case study in contributions
To demonstrate the impact of extra contributions, Cbus has come up with two case studies, using two different investment options.
Tina, 25, has a super balance of $10,000 invested in the fund's default growth option and is working full-time earning $70,000 a year before tax.
She starts making salary sacrifice contributions of $100 a week, or $5200 a year.
She also switches her investment option from the fund's default option to high growth, taking a long-term approach.
Her weekly pay drops by only $67.50 due to the tax saving of salary sacrifice.
By making extra contributions early, Tina's balance grows by an extra $363,487 by age 67 to $818,001, compared with $454,514 if she hadn't taken those extra measures.
Nathan, 35, earns an annual salary of $80,000 before tax and has $40,000 in super invested in the default growth fund. He decides to build up his savings for retirement by making extra before-tax contributions into super of $10,000 a year.
In the first year, Nathan saves $1700 in tax as his extra contributions into super are taxed at 15%, instead of his marginal tax rate of 32%, including the Medicare levy.
Nathan will likely have $370,723 more in super for his retirement at age 67, with a balance of $784,706 compared with $413,983, if hadn't made extra contributions.
Although Tina is contributing less than Nathan, her retirement balance is bigger because she has made extra contributions for a decade longer than Nathan and switched to high growth.
"As the above examples demonstrate, when all is going well, extra contributions and investing for the long-term will pay off. However, you also need to account for the alternative if something happens to you," says Cbus' Marianne Walker.
One way to protect yourself is insurance through super.
"Insurance can provide an amount payable if you were unable to work due to injury or illness, you became terminally ill or if you were to pass away.
It's also important to have a valid beneficiary nomination in place so your loved ones are taken care of without delay.
"Ultimately, the purpose of super is to build up your money to provide for your retirement. Starting to make contributions early and investing over the long term can make a big difference to your retirement."
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