What I wish I'd known about superannuation


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Superannuation is a bit like cholesterol - and not just because both have long names. By the time you need to know about it, you wish you'd known more, earlier. It's not hard to put super on the backburner. Most of us are too busy in the present to worry about something that is strictly for the future.

But you don't have to become an expert to make the most of your retirement savings. Here's what you need to know, as opposed to all the technical stuff you don't want to know.

Super is all about compound interest


And compound interest is wealth-creation magic. Financial planner Laura Menschik, of WLM Financial Services, says saving consistently over many years is a powerful strategy for building wealth, as compounding means you earn interest on your previous interest - much like a snowball grows in size rolling downhill.

If you start early, your snowball can multiply in size by the time it reaches the bottom of the hill. But if you start near the bottom, it doesn't have time to pick up extra snow before it stops moving.

"Super is forced savings," she says. "And even little things add up. If you can put a bit extra in for 10 years it provides quite a bit of extra benefit at the end of the day."

Super isn't just for old people

John Perri, AMP technical strategy manager, has a favourite cartoon where one character asks how to motivate himself to save in super. The answer? Get older.

But thanks to compound interest, you get far more bang for your super buck if you put it away when the idea of having grey hair and not working is inconceivable.

Glen McCrea, deputy chief executive of the Association of Superannuation Funds of Australia (ASFA), says if someone aged 30 consistently put aside just $250 a year, or around $5 a week, they'd have about $14,000 more by the time they retired. Little things add up.

If you can afford a bit more, AustralianSuper group executive Paul Schroder says a 25-year-old putting an extra $50 a month into super will have an extra $175,000 by age 65, whereas a 35-year-old who did the same would have an extra $79,000 and a 45-year-old $32,000.

Menschik says governments have also been progressively limiting the amount you can contribute when you're older and trying to catch up.

She says parents and grandparents often help by directing any spare cash into younger people's accounts, particularly to take advantage of tax bonuses such as the super co-contribution.

The government helps pay for your super

Fancy a 50% return on your money, guaranteed by the government? If you earn less than $38,564 and can find $1000 to put into super in a year, Perri says you can get that return through the super co-contribution.

The government will give you 50c for every $1 you chip in up to $500. If you earn between $38,564 and $53,564, you will still be eligible for part of this benefit.

Perri says most people can also claim a tax deduction on contributions up to $25,000 by either asking their employer to contribute the money from their pay before tax, or by making a personal contribution and claiming the tax deduction themselves.

The net result, either way, is that you pay just 15% tax on your super contributions as opposed to your marginal rate, and any future earnings on that money are taxed at a maximum rate of 15%.

Menschik says if you can salary sacrifice that's usually better than making a personal contribution at the end of the year. While the tax break is the same, she says it's easier to have the money taken out of your pay automatically than relying on discipline.

She says there is even a benefit in making extra contributions after tax, especially when you're older, as your money can grow in that low-tax environment and provide a tax-free retirement income or lump sum after age 60.

Perri says there are also tax breaks on contributions made for a low-earning spouse.

You don't need mega-millions

People often think they need squillions for a comfortable retirement but it may be more affordable than you think.

McRae says ASFA has calculated you need around $640,000 to fund a comfortable retirement for a couple and around $545,000 if you're single. That will generate a yearly income of about $61,000 for a couple or $43,000 for a single, combined with a small part age pension.

"It means you'll be able to go to the club and have a meal, go on the odd holiday, get your car fixed when you need to and generally make sure the adjustment in your standard of living is not so dramatic you can't enjoy yourself," he says.

Of course, if you want a more opulent lifestyle, you'll need to save more. There are retirement calculators online to check whether you're on track. Start with the Australian Securities and Investments Commission's MoneySmart site or ASFA's Super Guru.

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Super isn't generic

Perri says it's important to understand that super is just a structure, not an investment. Your money is held in trust for your retirement and the trustees make decisions on how it's invested. So it's worth knowing what they're doing with your money.

If your fund was chosen by your employer, chances are that you're in a default option - usually a balanced fund that holds a mix of investments or one where the investment risk is adjusted for your age. But if you are unhappy with this choice, there are alternatives you can explore.

You can also switch funds if you're unhappy with the investment performance or fees and charges.

Schroder says good investment returns and low fees are critical as a 1% difference in net returns can translate into a difference of almost $100,000 in retirement over the longer term. McCrea says most balanced funds have been returning around 7%-8% in recent years so if your fund has been returning 3% you should ask why.

"Often it's as simple as gut instinct," he says. "If fees seem high or your balance is not going up in an orderly fashion, you need to find out more."

Information is at your fingertips

Menschik says even those just starting out should take five minutes a year to read their super fund statement. This handy little document tells you how much you have, where your money is invested, what your fund has earned and what you've paid in fees and charges.

It will also tell you whether you have life insurance through your fund and who will get your super if you die. Menschik says you should check these details to ensure the cover is appropriate for you and you have nominated who you want your money to go to.

McCrea says most funds now have websites and apps where you can check your account balance and other details. You should also be able to transact or change your preferences digitally. Or you could just go the old-fashioned route and make a phone call.

If you have changed jobs and are not sure where all your super is, the Australian Tax Office website can help to track down old accounts so you can consolidate them and avoid paying multiple fees and charges

Menschik says there are also comparison websites where you can check how your fund measures up.

But make sure you're comparing apples with apples. She says even funds with names like "balanced" can mean a range of things, so look at their investment mix, what their stated objectives are and whether they're meeting those objectives. She says you should focus on longer-term returns, not just the past year or three years, as super is a long-term investment.

Advice is there if you need it

Perri says most fund websites have material to educate members and offer so-called "intra fund" advice that is general in nature. Financial planners, either through your fund or independent, can provide more personalised advice when you need it.

You can keep getting paid after you retire

Possibly the best thing about super is that you can use it to draw down a regular, tax-free income when you retire after 60. You can transfer up to $1.6 million into a super pension when you stop working and both the income you receive, and any earnings on your money within that fund, are tax-free.

Menschik says you can choose how much income you want and how often you want to receive it, so long as you take a minimum amount determined by your age. She says you can also take part, or all, of your super as a lump sum in retirement - for example, to pay off your mortgage when you stop working.

Perri says if you can afford to have other assets outside super, the tax on them will be unaffected by your super income as it doesn't have to be declared in your tax return.

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Annette Sampson has written extensively on personal finance. She was personal editor of The Sydney Morning Herald, a former editor of the Herald's Money section, and a columnist for The Age. She has written several books.