How to turbocharge your super fund balance in your 20s
Millennials have an invaluable tool at their disposal: it's time.
As investors, which they all are thanks to compulsory super, they have long time horizons, can afford to invest in higher-return options, take advantage of market cycles and therefore reap much greater rewards.
Nathan Bonarius, senior analyst at actuarial firm Rice Warner, says: "It's better than doing so when you are older. If you put in $10,000 when you are 25, and assuming you get a real return of 2%, you will have $23,000 at retirement - so more than double. If you wait until your early 60s to get the same increase in balance, you might have to put in $20,000.
"At that younger age you have a long time horizon and can afford to put it in more growth-orientated investment options. It's locked up for a long time so it's often appropriate to take on a little more risk. Cash would be the riskiest place to keep it. You wouldn't earn much."
You should also take into account the appropriateness of fees and insurance.
"You can't predict returns but you can predict fees," says Bonarius.
"Make sure you're not paying too much compared to other products. Also be aware if you cancel your insurance you may not be able to get it again without medical underwriting. It might be appropriate to cancel it now, but it might be harder to get later."
Contributing more can really turbocharge your super account. And every little bit helps. For example, making coffee at work a couple of times a week instead of buying it can have a dramatic impact.
Martin Fahy, CEO of the Association of Superannuation Funds of Australia (ASFA), gives the following examples to demonstrate the impact of doing so.
"If you put in $50 a month extra in additional contributions starting at 20, it gives you $50,000 extra in retirement; if you do that when you are 30 it gives an extra $33,500 at retirement; if you start at 40 it would give you $21,400; if left until 50, you'd only have $11,300; and if you started at 60 you would have just $4300 extra," says Fahy.
He is upbeat about millennials and their ability to think long term.
"They understand it with climate change. They understand it with sustainability issues, they understand it with health. We need to encourage them to take the same long-term thinking with retirement."
Investing in growth options is appropriate, he says.
"Over a 10-year period there may be some cycles, but given these people aren't going to be drawing down on their super for another 40 years, now is a good time to dial in some of that risk to get the higher returns."
Super has many advantages we take for granted: it is compulsory and professionally managed.
"People wouldn't save without it," says Bonarius.
Finally, super provides tax benefits and remains an attractive savings vehicle, including for low-income earners, says ASFA.
For an individual on less than $37,000 a year the effective tax rate on super contributions is zero when the impact of the low income superannuation tax offset is taken into account.
Outside super, the tax rate, including Medicare levy, is 21% for those who earn above $18,200.
For individuals on an income of $37,001 to $90,000, the tax rate including Medicare is 34.5%, compared with 15% within super.
Case study: David
David is 30 and earns $70,000 a year in an office job, receiving the benefit of the 9.5% SG.
He is on track to reach the ASFA comfortable standard of living by the time he retires at 67 with $568,600 if he currently has $50,000 in his super and the SG increases to 12% by 2025.
If the SG stays at 9.5% David would be projected to have significantly less - $497,000 - at retirement.
Benefits of super at 12%
The super guarantee (SG) is legislated to go up to 12% by 2025, starting with 0.5% increments in 2021. It will mean 50% of Australians will get to live comfortably in retirement by 2050 - over double the current proportion, according to ASFA.
For a 30-year-old on $40,000 a year, with a current balance of $20,000, compulsory super will deliver an estimated $263,500 at retirement. This will increase retirement income from $23,662 a year (the age pension including allowances) to $34,078 a year.
Some Liberals argue it shouldn't be lifted as it will dampen wages.
But ASFA CEO Martin Fahy disagrees.
"Wages have been stagnant for about seven years. Yet at the same time the ASX sits about 6800. It shows all the gains in productivity, however modest they have been over the last 10 years, have accrued primarily to the providers of capital, not to the providers of labour.
"Moving to 12% is a guaranteed way of capturing those gains for workers and giving them a better retirement."
*All figures are in today's dollars.
Case study: Ann
Ann, 30, is a park ranger.
She earns $60,000 a year and currently has a super balance of $20,000. With the SG rate due to increase to 12% by 2025, Ann will have $422,000 in super savings at retirement (age 67).
This is around $66,000 more than if the SG remains at its current rate.
Ann will have a higher standard of living in retirement when the SG rate increases, with an annual retirement income of $40,900, compared with $39,200.