By: Ryan O’Grady Financial Planner at Navigate Financial Group
Structure of super
Super is money set aside over your lifetime to provide for your retirement. For most people, super begins when you start work and your employer starts paying super for you. Currently in Australia, if you are an employee of a company, Your employer must pay 9.5% of your salary into a super fund. This is called the Super Guarantee and it’s the law.
Super funds invest your money in many things, such as shares, property and managed funds. What a lot of people do not know is that you are in control of where your super is invested. If you do not select an investment option, funds will simply place you in a “default” investment option. It is important to review your super to ensure that you are happy and comfortable with how your money is invested.
People tell me super is not a good investment
There is often a myth associated with some people that super itself is an investment. Super is simply a tax effective way of investing long term savings. There are also restrictions to accessing savings to ensure the money is saved for later on in life. There are many different ways to invest your savings with a super fund and it is very important to understand the risks associated with each option. When clients know how their money is invested and the risks associated with each investment, they may become more confident and make more informed financial decisions.
During your working life, super contributions and earnings are taxed at 15%. For most people, this means that super will be taxed at a lower rate than a similar investment outside super.
You may be able to obtain certain insurances such as Life, TPD and Income protection policies through super. This can be beneficial for people who have limited cash-flow, as well as being easy to manage as premiums are deducted automatically.
Insurance inside super can also be advantageous as the premiums are paid for using your super money as opposed to your after tax income.
Albert Einstein called compound interest “the greatest mathematical discovery of all time”. You earn interest on the money you deposit, and on the interest you have already earned – so you earn interest on interest. The earlier the start, the better off you are. Below I have outlined an example to demonstrate the power of compound interest.
David is 25 and just starting work. He is paid a salary of $50,000 and his employer pays him 9.5% super ($4750/year or $395/month). Below is a basic calculation of the total savings David could have if he saved for 40 years (Until age 65).
Shane is 35 and just starting working for a company. He is paid a salary of $50,000 and his employer pays him 9.5% super ($4750/year or $395/month). Previously Shane has had a few different part time jobs and has accumulated a total of $20,000 in super. Below is a calculation of how much Shane can save over the next 30 years until age 65.
As you can see from the above calculations, David is in a much better position at age 65 than Shane due to the fact he started saving earlier. Another very important figure to note is the total amount of interest earned which is far more in both cases than the money that was deposited. These figures should not discourage anyone of any age from saving, but rather answer the question of when is the best time to start saving. There is no better time than now…
(Note: Calculations were completed using the Moneysmart.gov calculator and do not take into consideration fees. The figures used are just an example and should not be used for any personal assessment. The calculator can be found at the following link https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/compound-interest-calculator )
Things to consider
How much do you need?
To work out how much you will need to save is determined by what your retirement goals are and how you would like to spend your retirement. Things to consider are how long your money will need to last? The retirement lifestyle you would like as things such as providing for children or grandchildren. It is important to discuss and work out your retirement goals as time is an important factor in planning (even if it seems a long way off).
When can I access my super
You are able to access your super when you:
- Reach preservation age and retire
- Condition of release
- Turn age 65
- Under the transition to retirement rules, where you reach preservation age and are still working. (Under the transition to retirement rules, you can withdraw some of your super as regular payments from your super savings to supplement other income you receive. There’s a limit on how much can be drawn down each year.)
|Date of birth||Preservation age|
|Before 1 July 1960||
1 July 1960 – 30 June 1961
|1 July 1961 – 30 June 1962||
|1 July 1962 – 30 June 1963||
|1 July 1963 – 30 June 1964||
|From 1 July 1964||
For many people, super will be the largest investment that they have in their life. It is very important to take an interest in your super savings at an early age to ensure that you maximise the chance of reaching retirement goals later in life.
Authorised Representative, AMP Financial Planning
Navigate Financial Group Pty Ltd, ABN 91 414 170 076 is an Authorised Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327, AFS License No: 232706.
‘This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
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