Why I'm Already Topping Up My Super Fund

"Why should a 20-something bother thinking about their retirement?" This was my mentality up to the age of 23. I wanted to live in the 'now' and being 60 was simply unfathomable. Anyway, what if I get hit by a bus next year? Then I would have been squirreling away extra money for nothing. My employer already makes contributions to my retirement, so that will be fine.

Money picture from Shutterstock

In Australia, it is compulsory in most circumstances for employers to pay a proportion of an employee's salary into their superannuation fund, which is effectively their retirement savings. The minimum proportion is 9.25 per cent as at July 2013 however this is set to increase incrementally and very gradually, to 12 per cent by 2021). Employees are encouraged to make additional payments into their superannuation funds, which can be done either before or after tax, each approach having their own pros and cons. The employee's date of birth dictates when they are able to access their funds. As I was born after 1964, I won't be able to access my retirement savings until I'm 60, 35 years from now.

I started seriously thinking about superannuation as a means to reduce my taxable income. I was on the second highest income tax rate, feeling like I should do something to reduce my taxes because it was the done thing. Aren't people always saying that the rich get richer because they know all the tax tricks? I have since learned that this isn't particularly true for salaried employees, but it did lead me to the concept of diverting some of my pre-tax income into my retirement savings, i.e. salary sacrificing.

Then it started making sense to me. My mother has been a stay at mum home for as long as I have been alive whilst my father is self employed (i.e. no government mandated retirement savings). My father, in my opinion, is absolutely terrible with money, being a bleeding heart who gives it all away to anybody who asks. My mother is slightly better off as she owns her home outright (my parents are divorced). But either way, I knew I would be looking after them when they approach retirement age because they hadn't planned adequately. I started realising it would be so much more pain free to start early by making small contributions rather than reach my 40s and 50s before panicking.

Start The Salary Sacrifice

So in August 2012, I began allocating $200 of my pre-tax income into my superannuation fund. By doing this, I reduced my taxable income and instead of being taxed 37 cents on the dollar of that $200 fortnightly contribution, I was taxed the concessional rate of 15 per cent. I was therefore able to save a higher amount than I actually missed from my pay packet (and I didn't really miss that amount at all, having already reduced my expenses significantly).

The Case Study below is from the MoneySmart website and this is a very handy salary sacrifice calculator on Mercer's website. My contributions will also enjoy the miracle that is compound interest, something that would not be as effective if I had opted instead to just make larger contributions decades later.

According to the Australian Securities and Investment Commission's MoneySmart website, a single person, retiring at the age of 65 and living to the age of 85 needs roughly $544,000.00 to live comfortably during those retirement years. MoneySmart advises that another way to estimate how much money you will need in retirement is to assume you need 67 per cent (two-thirds) of your income before you retire in order to maintain the same standard of living in retirement. It's best not to be complacent and just assume that employer's mandated contributions will leave you with enough.

My retirement fund is currently sitting at $53,704.07, whilst the average super balance for Australian women aged between 25 and 29 is between $12,000.00 and $16,000.00. This is partially attributed to the fact that I have been working full-time for longer than the average 25 year old. My superannuation fund has a projected benefits tool, indicating that if I continue salary sacrificing at the current rate, and retire at 65, my retirement savings will be around $954,246.00.

I am lucky though to have an employer that pays well above the minimum legislated superannuation contribution. I also am conscious however, that I won't be working for this employer for my entire career. And what if I become self-employed? So whilst this projection is reassuring in some ways, it's nothing to bank on.

Of course as a 20-something I have more pressing priorities such as saving for a house deposit and growing my emergency funds, but 'setting and forgetting' a small super contribution has definitely made me feel more secure financially.

A 20-something’s thoughts on saving for retirement: it’s never too early. [That Career Girl]

That Career Girl is a blog about the happenings of a 20-something full-time career girl and part time MBA student in Melbourne.


Comments

    Smart girl. I wish I had listened to my father harp on about it when I was young.

    Let's just hope that by the time you're able to withdraw it, you're not dead or half of it isn't gone in a new tax scheme...

      I don't have faith in the super scheme remaining in the current form by the time I retire.. So I shall invest my money elsewhere.

        Who needs faith, SMSF allows you to control the investments, plus you only pay 15% tax on the first $25k/year that you invest into super. Sure you can't touch it till your 65, but are all your investments for the short term. I hope not.

    Also might be worth checking with your employer if they offer any incentives for doing this. Some offer deals where if you salary sacrifice 2% or so extra they'll match the contribution.

      Many superfunds give discounted or cheap life insurance if you sacrifice extra, which is good value too.

    I am always harping on about investing and often get told the whole "but what if you get hit by a bus and die tomorrow? Enjoy your money now".

    For a start, if I die tomorrow then I won't be thinking, if only I had more fun. I'll be dead.

    But more importantly, I personally know a lot of older people who retired, then battled health issues and often died within 10 years.

    Instead of focusing on Super, better IMO to invest yourself and plan to retire as early as possible. Sure, it might require a few more sacrifices now, but why do people want to work for an income till they are 60 or 65? I know some people like to keep working, but I would prefer the choice not to.

    I plan to be totally financial independent without Super. If what I have is worth anything when I am 60, I will throw a massive party!

      Great point, one of my goals is definitely to have enough to retire earlier than 60 (whether I do or not is another thing). I am currently also saving 50% of my pay for our first home. Although, I do really need to brush up on my knowledge of investing in areas.

    I've been working off of the tip that you should contribute 15% of your salary to super from the age of 25 (i.e. 40 years of contributions) to retire comfortably, regardless of how that 15% is made up. So if your employer gives you 9% you need to contribute an extra 6%.

    Great times to be putting your well earnt money into unknown investments!

    Saving should always be applauded, and you're doing a great job :). Here's some things to consider though! Is Superannuation the best way to go, and why do you need 2/3rds of your pre-retirement income after you've gotten established in life?

    So at your current contribution rate, you'll get $954,246 at the age of 60, a good $410,246 more than what you have estimated you'll need. Imagine what that money could be doing to reduce your costs early in life (such as reducing the size of a home loan, saving thousands on interest), increasing the amount you can save in the future? On this point, it might be worthwhile reducing the additional contribution you're making, so you can use this money now, allowing you to save more down the line.

    By far the biggest negative for me with super as an investment strategy is that it dictates when you get to retire. If you invest outside of super, when you've got enough money, you can choose to walk away when it suits you (such as before you've saved that superfluous $410,246).

    On the point of "how much you'll need", it always perplexes me why such large sums are recommended. I think two errors are commonly made: assuming a retiree will have the same expenses of the "average" person, and that you'll stop gaining any interest on your savings, and will have to chew down your capital year after year.

    For the first error, consider this - As a retiree, you've paid off your house, car, etc., you don't have work related expenses, and any children have left home and are no longer dependent. Would you still need 2/3rds of your income to live? You've probably been surviving on a lot less than that for many years, saving 2/3rds or more, since your living expenses have declined.

    For the second error, even with a high 4% CPI, $544,000 invested at a lowly 7% return will still be gaining around $16,000 a year.

    A final thought is, with the improvements in medical technology, how long do you thing we'll be living, we might see that enforced minimum retirement age shift later and later as we adjust for how healthy we'll be. :) I'll continue my plan of retiring at 35, and see what happens from there.

      These are great points and certainly food for thought. I am saving half of my after tax income towards a first home, which I will be aggressively paying down. For me, the $200 pre tax is a nominal amount and if I hadn't started there, I probably would have been using it as discretionary income. I do need to get more financially savvy with other investment methods. Wow at aiming towards retiring at 35, that's quite the goal! Good luck!

        Thanks :)
        If you're interested in the strategies I'm using and the philosophy behind it you can check out the following book and sites.
        Your Money or Your Life is a great read that I recommend to anyone who works. Thinking of money as time is one of the best psychological changes I've ever made (money is time, rather than time is money). Makes a huge impact on your spending habits.

        http://www.amazon.com/Your-Money-Life-Transforming-Relationship/dp/0143115766
        http://www.mrmoneymustache.com/
        http://earlyretirementextreme.com/

    I don't know. They're just going to keep raising the retirement age as the population gets older (thanks to modern medicine), so you'll just be working longer but only be retired for the same amount of time, meaning more money to spend in the same time period. So is it really that critical to save more money for it? I'd prefer investing that money, and paying off a mortgage etc asap. Then you're laughing.

      You definitely sound like an Aussie.

      I think you should buy at least 10 to 20 properties and ASAP, buy them all up....you'll make a fortune within 7 years! Just do it please....

        I don't know how to take your comment.

          I think it's saying instead of making your bank rich, buy property. Then the property makes you rich.

    I'm just going to take up bank robbing at 67............I don't know how good I will be but it should make retirement more interesting..........

    The joys of government work at 17% employer contribution.

      I thought the standard was 15.4%?

        I've worked in the university sector for 20+ years. I'm currently 45. My super balance is just shy of $500,000 and I'm not senior management. As a university employee, my employer contributes 17.5% of salary equivalent to my super. I can also contribute extra. I was salary sacrificing extra up until a few years back then stopped my personal contributions and put that extra money on my mortgage. At that time mortgage rates were 7-9% so it made sense to 'invest' in my mortgage rather than the stock market. I'd get a better 'return' now by putting that extra into my super as the mortgage rate is about 5% and the super seems to be averaging about 10% over the last few years. However, the way the government keeps changing the rules on super I'd rather know the money is doing something constructive now than hope that some day in the future they may actually let me have my super. Every individual circumstance is different. If you're in your early twenties I would recommend seeing an INDEPENDENT financial adviser (not one that works on commission) for advice. I think myself very lucky that I have a healthy super balance whilst still having 20 years of work ahead of me, but not everyone can work for a good employer like a university.

          Great example, that highlights how circumstances can play a part in how you divert your money.

    Meh, nothing to get excited about with my big generic super fund, because the govt made it legal for large employers to force a super provider on their employees to save on overheads. If I was able to get myself a MUCH better deal like the super I was with previously then putting more money away might be more appealing.

    I agree saving for retirement is a great idea, but the decision to use Super as the vehicle is not so straight forward.

    The problem is that the Government keeps changing the rules for Super (tax/access etc). So there is a risk that you wont be able to access the money in the future as freely as you can now. You need to factor that in to your risk/return decision.

    Given the trend of structural budget deficits into the future (due to the aging population), and that the Aussie super pool is a massive amount of money, it will be increasingly tempting for Government's to tap the pool for revenue.

    I joined the Federal Public Service at 22 and into the old defined benefits super fund. My employer contributes 15.4% on top of anything extra post tax that I contribute (and I do). The old fund means that, provided I work in the APS til I retire (with no more than 12 mths break at a time) I can walk away with a pension for life equal to the average of my final three years salary before retiring. At my current three figure salary (aged 33) I'm on track to walk out with a lump sum of over $2.5 million or a three figure annual pension (or some combo of the two). That's on top of accumulated cash, shares & property outside super #happydays

      Unfortunately defined benefit schemes are little more than a legalised Ponzi scheme where new members subsidise the 'pension' of retiring members. Most defined benefit schemes are now closed to new members because of the high cost of paying those 'pensions'. I'd be wary of relying on a DB scheme if it's more than few years away as the super fund still has to find the money to pay it and at will most likely come from 'volatile' investments.

    I think the first and most important thing a 20 something can do is get their home loan paid off ASAP. For every year you can take off a home loan it will save you $thousands. Later you can invest the money you would have otherwise been giving your bank.

    This brings me to an interesting/frustrating thought I've had:
    Imagine if you could use your superannuation savings to offset your home loan!
    e.g., home loan of $300,000 and superannuation of $50,000 = only pay interest on $250,000. Saving $2500 a year on a 5% interest rate.
    Unfortunately there are laws against this, and given who makes laws (corporations and people without mortgages) it's unlikely to be changed, but just imagine!

      last I checked. corporations don't make laws for superannuation (or any other law for that matter). They might lobby for them however - which is why proposed increases to employer contributions have been delayed for a few years. Suspect also a lot of people who make Commonwealth laws (you know, those Federal politicians ... ) also have mortgages. But yep - acessing your super to help enter a mortgage could be a good idea (provided property values go up, you keep contributing to super so you aren't reliant on minimal govt funding wheh you retire and that you aren't redrawing those funds towards other purposes).

      An interesting way around this is to manage your own super fund (SMSF) and rent your house back from your super fund.

    The probability of anyone under the age of 40 on a decent income seeing anything close to all their super before dying is approaching zero.

    You would be mad to put any more than the absolute minimum into super. About the only thing crazier would be to using an SMSF to leverage it into property.

    Take your extra money and invest it elsewhere as a retirement strategy. It's not as tax advantageous, but at least the chances of legislation preventing you from accessing it being passed are pretty low.

    The reality for a lot of us is that home and family draws all of our resources for a long time. Only when people are over say 50 years old with mortgage paid off and children grown up can they contribute big licks to super (to the extent it might be allowed by the rules at the time) and pump up their balance to a useful amount. I would not be too quick to recommend that young people pay more than the legal minimum into super. Paying your house off first may be a better strategy and it has a 'feel good' factor too.

    I don't understand why so many people here are anti-super? If you are engaged enough with your fund and understand how super works and the benefits of forced saving for your retirement then i'd think more people like myself (also female and 25yrs old) would be quite positive about the future?

    Through my super I have Death, TPD and IP insurance at a very competitive rate, salary sacrifice and am also lucky that my employer contributes above the average 9.25%. If you are unhappy with your fund you should do something about it! Do your research and compare funds through the Industry Super website to ensure you're doing the best for your future.

    And if you do get hit by a bus tomorrow be thankful that you are insured with your super, so if you live to tell the tale and are temporarily or permanently disabled you’ll be covered. And that if you do die your beneficiaries will most likely receive your super and death insurance (this is why updating your beneficiaries is important!) which can help with funeral costs or paying off any debts, mortgages or even looking after your children once you are gone! Too many benefits of super in my opinion...

      This!

    My best comment award goes to MissM!

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