Investment Basics
Super is your money. We'll take you through the basics of investments, including how your super in invested.
Investments can seem like a tricky subject, but understanding the basics is a good first step. We'll start with how money in super grows. Next, a default investment option, my super life cycle and the different investment options available to you at Aware Super. Later we'll look at the importance of staying invested during times of market uncertainty. Let's get started. Money in super grows because it's invested in things like the share market and property, and because you usually can't access super until you retire. Your money benefits from what's called compounding. With compounding it's not just your investments that can make money, the earnings you make on that money can also grow. By the time you retire, around 60% of your super balance could be from your own contributions and the other 40% from these compounded investment earnings. Choosing investment options is about balancing the relationship between risk and growth potential. It's also about matching your investment choices to your circumstances and needs over time. Super is a long term investment, and your investment priorities will likely change as you get older. To make the most of super. It's important that your investments change with you. That's where My Super Life-cycle fits in. When you start receiving super if you don't make an investment choice, it's invested by your super fund in what's called the default investment option. At aware Super our default investment option is called My Super Lifecycle, which is designed by investment experts to automatically adjust your investment mix to suit your age. My Super Lifecycle has three phases grow, manage, and enjoy. From the time you open your super account until you turn 56, your money is invested in the grow phase. This phase of the life cycle makes the most of your ability to grow your super, and aims to maximise your returns over the long term. You'll be invested in a high growth option, and your investment mix will generally be higher risk because you'll have time to ride out any market ups and downs. When you turn 56 and into what we call the manage phase, we'll begin making a series of yearly adjustments to your investment mix. As you approach retirement risk is slowly reduced to help safeguard your savings to help you retire with more. From age 65 you'll move into the enjoy phase. The lower risk, conservative balanced option here helps to safeguard your retirement savings and provides you with a more stable, ongoing return. More than 85% of our super members are investing in My Super Lifecycle. But if you want to be more involved in how your super is invested, you can choose from a range of investment options. The options you choose will depend on your investment goals and your comfort with each investment level of risk. Typically higher risk investments can grow more. But that growth can be more uncertain in the short term. Lower risk investments tend to grow less, but steadily over time. Either way. Super. We offer single asset class investment options, which means one type of investment like Australian shares or property or international shares or cash. We also offer diversified options where different kinds of investments are mixed together into a single option. These options can reduce risk by making it less likely that negative returns from one investment will impact the rest of your investments. Put simply, it means that all your eggs aren't in one basket. Our core diversified options are Defensive, Conservative, Conservative Balanced, Balanced and High Growth, and they have a range of risk and potential returns.
Now he's a chart that shows how investment options with different risks performed over time. The line at the bottom shows the performance of the Cash investment option. Cash is a lower risk investment and this shows in its steady but slow progress. $100,000 invested in the cash option in 2013 was worth around $119,000 ten years later. Compare that to our Conservative Balanced option, which grew to around $184,000 and as you'll also see, that Conservative Balanced encountered some ups and downs along the way.
Finally, our High Growth option, which climbed in value even more to around $243,000. You'll notice the ups and downs are even bigger along the way here.
Choosing investment options is about balancing this relationship between risk and growth potential, which can change over time. More than 85% of our super members are investing in our My Super Lifecycle option, and 15% choose their own investment options. When we invest in environmental, social and governance, or ESG considerations is part of our process for all investment options. We also offer additional investment options for members who want greater certainty about the environmental and social impact of their investments. Our socially conscious investment options are designed for members who are looking to avoid investments in particular industries and companies. The investments for these options are selected and managed according to specific restrictions and exclusions, known as screens. You can read more about these in our PDS. Super is a long term investment and like all long term investments, there will be times when the markets change quickly. This is called market volatility. When markets are tumbling, as they sometimes do, the news feeds can be unsettling. You might wonder whether you should sit tight or cash out. However, by switching to cash when markets are down, you risk locking in your losses. In this chart, we can see the impact of switching to cash during a market downturn, as happened in 2020 between February and March, the Aware Super High Growth option lost around $15,000 of its value, but by November of the same year, it was worth more than it was before the drop. Anybody who switched to cash on March 23rd saw little to no growth for the same period. So instead of avoiding a loss, they locked it in. As you can see, there's lots to learn about investments. To find out more or to make sure you're on the right track. Make a free appointment with one of our experts. Just visit aware.com.au/book.
Government Age Pension and other benefits
Understand how the Government Age Pension and other benefits can work with your super, to provide the income you need in retirement.
Understanding the Government Aged Pension is important for planning your retirement, so you can see how it works with super. We'll look at eligibility for the Government Aged Pension and how it can make your super last longer. Will also look at how you can begin to access your super and other government benefits.
While you're working, your income is mainly the salary you earn. But when you retire, your income could come from a few different places your super savings, your personal savings. Any other investments you have. And the Government Aged Pension. The Government Aged Pension is an income support payment to help eligible older Australians afford their basic living expenses in retirement. More than 60% of Australians over the age of 65 receive extra income from the Government Aged Pension. Generally, to receive the aged pension, a person needs to be eligible pension age and an Australian resident who's lived in Australia for at least ten years. The age when you can start receiving the Government Aged Pension depends on when you were born. You'll find your eligible age on this chart.
If you've reached the required age, you'll also need to prove that you actually need the pension. To see if you're eligible the government uses income and assets tests. For couples, your combined assets and incomes will be tested. The income test looks at all the sources of income you receive. This includes income from financial investments such as super, savings and shares. The assets test measures the value of the things you own, including your car, furniture and other valuable assets like jewellery and boats. Once you've reached your aged pension age, the assets test will also include your super. The assets test does not include your home. Whichever test gives you the lower payment amount is the one that will be applied.
If you qualify for the Government Aged Pension, you'll receive a payment every two weeks. As of July 2023 that means a maximum of $1,064 for a single person, or $1,604 for a couple, or just below $28,000 a year if you're a single person and just below $42,000 a year for a couple, these amounts can change so you should check with Centrelink for current rates.
As we've just seen, the Government Aged Pension is designed to work with super and make it last longer. Now let's look at how you can start receiving your super as an income, which you can do once you've reached your preservation age. You'll find your preservation age on this chart. Remember, your preservation age is different from your government pension age, which was shown earlier. There are two ways to keep your money in super and convert it into a steady income, while you're still working or when you've retired. Once your account is set up, you'll receive payments directly into your nominated bank account. For both options since your money stays invested, it keeps earning investment returns, which means you could have more income throughout your retirement. And there are tax benefits to. Let's look at the first option. If you've reached your preservation age and you're still working, you can open a transition to retirement account. This can be good if you'd like to work less but still want to maintain your current pay. A transition to retirement account helps you ease into retirement by paying you an income from your super while you continue to work. So your super keeps growing as you start to wind down. And you could save on tax at the same time. The second option is to convert your super into income by opening a retirement income account with us. You can do this when you retire and meet your preservation age all once you've reached 65. A retirement income account lets you start withdrawing regular tax free income from your super, and because you're still invested, your super can keep growing. With this account, you can control how much and how often you receive payments and you can make changes whenever you need to. So now that we know more about income accounts, let's look at the benefits of staying
invested. Because if you keep your money invested, it could mean you could have more income to enjoy in retirement.
In this example, you can see the difference between withdrawing super and investing your money in a bank account, compared to leaving your money in super and receiving it as an income. Staying invested in super means you could have over $5,000 more each year. Over time, this could make a big difference to the amount you have to spend in retirement.
Now let's look at an example of how the government age pension can help make your super last longer. Eliza is 67 and has just retired. She lives with her pet dog in a house she owns and has paid off her mortgage. She has $300,000 in super but very few other assets and only a small amount in savings. Eliza works out she'll need $49,000 a year to spend in retirement. Then using the Centrelink payment finder tool, Eliza finds out she could receive about $28,000 per year from the Government Aged Pension. Eliza can make the most of her aged pension payments and use this $28,000 a year first, so she'll only need to withdraw $21,000 from her super each year. Without the Government Aged Pension, allowing for investment growth of 6% a year, Eliza's super would last just over six years. But with the Government Aged Pension, her super could last over 18 years until Eliza is 85.
Now, here's an example where the aged pension won't apply. Marg and Gino are in the seventies, married and retired. As high income earners they've paid off the mortgage on their home, they have about $600,000 combined in their super accounts, they also have a holiday home worth about $450,000 that they rent out. Their family home isn't counted towards their assets. However, using the Centrelink payment finder tool, they discover the combined value of their super and holiday home is above the assets test limit. They won't be eligible for the Government Aged Pension. So Marg and Gino will need to use their super and their rental income to fund their retirement.
As well as providing income to make retirement possible, the government offers benefits for retirees to help make life less expensive. If you received the Government Aged Pension, you'll also receive a pensioner concession card. This saves you money on things like medicine and health services. Depending on where you live, it could even save you money on gas, water, electricity, car registration and public transport. If you're not eligible for the Government Aged Pension, you might qualify for a seniors health card. This saves you money by lowering the cost of prescription medicines, health services, energy bills and transport. As you've seen, over 60% of Australians will use the Government Aged Pension to help bridge the gap between super, their savings and their desired retirement income. To make sure you're on track. Make a free appointment to speak to one of our experts at aware.com.au/book
How much super is enough in retirement
Working out how much income you’ll need in retirement can be tricky. Learn more now, so you know what you need in retirement.
How much super do you need to retire? If you want to stop working one day it's an important question to ask. There's no magic number for how much you'll need in retirement. It's different for everybody. To help you figure out how much is enough, we'll look at the different types of income you might expect to receive in retirement and what your super could be worth as an annual income. We'll then look at how to build a retirement budget based on your current and future expenses. We'll also look at tax effective ways to receive your super as an income when you retire or even while you're still working, and how to save more if you can.
Okay, let's get started. When you retire, your income will come from a combination of super savings, personal savings, any other investments you have, and also, depending on your situation, the government age pension, how much comes from each will differ for everybody. Before you can figure out how much you'll need in retirement, you'll need to think about how long retirement could last.
Australians are living longer, which is great. In fact, if you're 65 now, there's a good chance you'll live to 95. So your super may need to last up to 30 years. So how much super will you need? The good news is you're likely to need less money in retirement than you need now, because once you retire, you won't be paying tax on your income or making super contributions and you might have paid off your mortgage and other debt. You'll even get seniors discounts, which can reduce day to day costs, such as public transport. That's why to keep your current lifestyle most people will need around 70% of their current take home pay in retirement.
While the super in your account may seem like a large sum. It's important to start thinking about what your super could be worth as an annual income.
To give you some idea. Let's look at Tina. Tina is 67 an Aware Super member and has $300,000 in super. If you think about that amount needing to last until age 95 as an annual income, it will be around $16,000 per year. It doesn't seem like much, but don't worry, it's not the end of the story. Because like 60% of Australians, Tina is also eligible to receive payments from the government aged pension. This could mean up to an additional $28,000 a year. Through her retirement, government aged pension payments will make up 64% of Tina's retirement income and her super will make up 36%.
Okay, so now that we've thought about retirement income, let's look at how you can budget for retirement. It's important to remember that your biggest living expenses when you're working are usually different once you're retired.
When you're working, your three biggest expenses are housing costs, such as rent or mortgage repayments and home improvements. The second biggest costs are grocery bills. The third is transport, which includes public transport and the costs of running a car. But when you're retired, your groceries are likely to be your biggest expense, followed by leisure activities such as travel, then housing and transport, and finally, health services.
A simple way to budget for retirement is by looking back at what you've spent in the past year. Start with your annual take home pay. Subtract anything you won't be spending in retirement, such as your mortgage or debt repayments. What's left is what you currently spend on your lifestyle and what you'll need as a retirement income if you want to maintain a similar lifestyle. As mentioned earlier, this is different for everyone, but for most people it's about 70% of your current income. Okay, so now you've got an idea of how much income you'll need to retire. But did you know you don't have to take all your super out
when you retire? In fact, doing so could reduce the overall income you have in retirement. Keeping your money in super and converting it into a steady income when you retire is easy. By simply opening a retirement income account. And because your money stays invested in the market all throughout your retirement, it can mean you retire with more. Before you can start receiving income from your super you need to reach what's known as your preservation age, shown in this chart. This is the age when the government allows you to access your super. You can also access your super if you're 60 or over and change employers or temporarily stop working. And from 65 onwards you can start withdrawing your super whether you're working or not. There are two ways to keep your money in super and convert it into a steady income, while you're still working or when you've retired. Once your account is set up, you'll receive payments directly into your nominated bank account. For both options, since your money stays invested, it keeps earning investment returns, which means you could have more income throughout your retirement. And there are tax benefits too. Let's look at the first option. If you've reached your preservation age and you're still working, you can open a transition to retirement account. This can be good if you'd like to work less but still want to maintain your current pay. A transition to a retirement account helps you ease into retirement by paying you an income from your super while you continue to work. So your super keeps growing as you start to wind down. And you could save on tax at the same time. The second option is to convert your super into income by opening a retirement income account with us. You can do this when you retire and meet your preservation age or once you've reached 65. A retirement income account lets you start withdrawing regular tax free income from your super, and because you're still invested, your super can keep growing. With this account, you can control how much and how often you receive payments and you can make changes whenever you need to. So now that we know more about income accounts, let's look at the benefits of staying invested. Because if you keep your money invested, it could mean you could have more income to enjoy in retirement.
In this example, you can see the difference between withdrawing super and investing your money in a bank account compared to leaving your money in super and receiving it as an income. Staying invested in super means you have over $5,000 more. Over time this can make a big difference to the amount you have to spend in retirement.
Growing your super is important. So now let's look at some simple things you can do to give your super a boost, so you can end up with even more for your retirement boost. We'll start with combining or consolidating a super. Super funds charge fees to take care of and help grow your money. And the more funds you have, the more you could pay in fees. Your super is your money. So if you want to keep more of it and grow it faster, it might be smart to combine all your super into one account. Another simple way to grow your super faster is through salary sacrifice if you can. With salary sacrifice, you simply ask your employer to pay some of your salary straight into super. You'll likely pay less tax on this money paid into super too. So in the long term, you could end up with more.
Even small amounts can make a difference. Let's look at an example. Susan is 35 earns $69,000 a year and plans to retire at 67. She currently has $62,000 in super. If she continues putting the minimum into super, her total super at retirement will be $446,000. However, if Susan puts an extra $10 a week into super with salary sacrifice, she'll retire with $20,000 more. And with $30 extra a week, she'll retire with $506,000. That's an extra $60,000 to enjoy in retirement tax free. By doing this, Susan will also reduce her taxable income so she'll pay less tax too.
Another option is to add more to your super using the money from your take home pay. Called after tax contributions, these extra savings may be eligible for a tax deduction by simply filling out a form with us called a Notice of Intent to Claim. And if you're on a lower
income, you could receive up to fifty cents from the government for every dollar up to $1,000 you put into your super from your after tax pay. That could mean as much as $500 extra in your super account next year in what's called a government co-contribution. Knowing how much super is enough and how much you'll need to retire can take some time to figure out. Everybody's needs in retirement will be different. But there's one thing we all have in common. The sooner we start planning, the better.
To make sure you're on the right track. Make an appointment with one of our experts for no extra cost. Visit aware.com.au/book
The more your super grows, the more you'll have when you retire. He will look at how the money in your super gross, how compounding can help you super grow faster, and how you may need to change your investment options as you get older. Will also look at ways to give you a super and added boost with salary, sacrifice, additional contributions, and consolidating any other super you might have.
Let's get started. Money in super grows because it's invested in things like the share market and property. And because you usually can't access your super until you retire, your money benefits from what's called compounding. With compounding. It's not just your investments that can make money. The earnings you make on that money can also grow. By the time you retire, around 60% of your super balance could be from your own contributions and the other 40% from these compounded investment earnings. The power of compounding can significantly increase savings in general. For example, think about what $10,000 could buy you. A few thousand coffees. A big overseas holiday. A used car.
Then look at what $10,000 could become with the help of compounding. Because the earnings you make a reinvested and those earnings also make money. In ten years, that $10,000, at 10% compound interest becomes $25,937.
Now, let's look at how investment options can power the growth of your super. When you start receiving super, if you don't make an investment choice, it's invested by a super fund in what's called the default investment option.
At Aware Super, our default investment option is called My Super Lifecycle, which is designed by investment experts to automatically adjust your investment mix to suit your age. When you're younger, your money is invested in higher risk investment options, which can grow faster. But as you approach retirement, the risk is slowly reduced to take a more balanced approach. This can help stabilise your returns as you get closer to the time you need to start using your super savings.
Your super is your money and if you're comfortable being more involved in how it's invested, you can choose from a range of investment options. The options you choose will depend on your investment goals and your comfort with each investment's level of risk.
Typically, higher risk investments can grow more over the long term, but that growth can be more uncertain in the short term. Lower risk investments tend to grow less, but steadily over time. At Aware Super we offer single asset class investment options, which means one type of investment like Australian shares or property or international shares or cash.
We also offer diversified options where a selection of different kinds of investments are gathered into a single option. These options can reduce risk by making it less likely that negative returns from one investment will impact the rest of your investments. Put simply, it means that all your eggs aren't in one basket. Our core diversified options are Defensive, Conservative, Conservative balanced, Balanced and High Growth. And they have a range of risk and potential returns suited for different periods of investment. We also offer diversified, socially conscious and indexed options. Now here's a chart that shows how investment options with different risks performed over time. The line at the bottom shows the performance of the cash investment option. Cash is a lower risk investment and this shows in its steady but slow progress. $100,000 invested in cash in 2013 was worth around $119,000 ten years later. Compare that to a Conservative Balanced option, which
grew to around $184,000. And as you'll see, that growth encountered some ups and downs along the way. Finally, a High Growth option which climbed in value even more to $243,000. You'll notice the ups and downs are even bigger along the way here.
Choosing an investment option is about balancing this relationship between risk and growth potential, which can change over time. More than 85% of our super members are investing in our My Super Lifecycle option. Only 15% choose their own investment options. Now we're going to look at some simple ways to grow your super even faster. Starting with consolidating or combining your super funds.
Super funds charge fees to take care of and help you grow your money. And the more super funds you have, the more fees you could pay, which may mean less money for you in the future. Consolidating your super in one place means you could pay less on fees. It can also help you manage your money more easily and reduce paperwork. Let's look at an example. Lucy and Jane are both 45 and each has $93,000 in their super. Jane's $93,000 is spread across three different super accounts. Lucy's is all in one. Jane's annual fees this year are expected to be $302, whereas Lucy's are expected to be just $198 between now and when they retire. Jane will pay around $2,000 more in fees. The money Lucy saves in fees means she has more money to grow in her super, and by the time she retires, Lucy will have $3,000 more than Jane to spend in retirement. As we've just seen, one quick action can make a big difference to your super in the long run.
Now let's look at simple ways to grow your super faster by adding more money into it. But before you add to your super, it's important to think about how much you can afford to put away, considering you typically won't be able to access the money until you retire. There are a few different ways of making extra contributions, some of which come with tax benefits. Salary sacrifice, personal contributions, spouse contributions, and government co-contributions.
It's important to know there are limits to how much you can put in each year. And if you go over these, you might have to pay more tax.
With salary sacrifice, you can contribute more than your standard super contribution. This additional amount can be added directly to your super from your pay. The money you add to your super with salary sacrifice is usually only taxed at 15%, which is generally a lot less than your marginal tax rate, which can be as high as 45%. This makes salary sacrifice an easy way to boost your super, and the money you put in can actually save you paying more tax. It also lowers your taxable income, which could benefit you when it comes to tax time.
In the following case studies, you'll see how adding a little extra each month through salary sacrifice can help you in the long run. Jessica is 34 years old, earns around $68,000 a year and has almost $58,000 in super. She decides to start doing more to grow her super through salary sacrifice. To begin with, she adds $100 a fortnight. Then on her 53rd birthday, she increases this to $150 a fortnight. And when Jessica turns 57, she increases it again to $200 a fortnight. Over the years until she retires at 67, the total of Jessica's salary sacrifice contributions is $99,500. But because of compounding her final retirement balance, grows $135,000 more than if she hadn't salary sacrificed. As an added bonus because Jessica's taxable income is reduced, she also saves on average, about $700 a year in tax. That's almost $23,000 in total over the years. Let's look at another example. Jacob is 42, earns $106,000 a year and has $120,000 in super. Through salary sacrifice, he begins adding $100 a fortnight on his 52nd birthday. He increases it to $150 a fortnight,
and when he turns 57, he increases again to $500 a fortnight. When he retires at 67, Jacob's total extra contributions are $149,000. But because of compounding his final retirement balance, grows $176,000 more than if he hadn't in salary sacrifice. And like Jessica, salary sacrificing reduces Jacob's taxable income. This saves him, on average, $1,360 a year in tax or over $34,000 in total.
It's amazing what small amounts can grow to over the years. It doesn't have to be much. Just whatever you can afford to add. Now let's look at personal contributions, also known as after-tax contributions or non-concessional contributions. These are a way of boosting your super using your take-home pay or your personal savings. You can make a personal contribution to your super by using the aware app, by direct debit or with BPay. If you've had a pay rise at work or just saved some money, your extra cash could work harder for you in super because the money you make from investing in super will be charged at a lower tax rate. Investment earnings outside of super can be taxed at up to 45%, but you'll usually pay just 15% on super investment earnings. And if you're under 75, you might even be able to claim a tax deduction for some of the extra contributions you make. Of course, before making extra contributions, you need to bear in mind that you may not be able to access that money again until you retire. But if you can afford to invest your after-tax dollars in super, it can be a good way to grow your money. If you're married or have a defacto partner, adding to their super account can help you save more. And it could also have some tax benefits. Adding to a spouse's super account can help top up a super account if one of you has taken time off work, stayed at home and care for children or family. Even if you both have a healthy amount of super, you may want to take advantage of the tax benefits that adding to a spouse's super account offer. There are two ways you can top up your spouse's super. Paying directly into your spouse's super fund using after tax dollars, such as your take home pay or savings, or splitting concessional contributions like employer contributions, Or salary sacrifice contributions with your spouse using pre-tax dollars. Different benefits may apply under the two options depending on you and your spouse's circumstances, and your investment earnings could also be taxed at a lower rate than outside of super.
Okay, we've covered a lot. Lastly, let's look at government co-contributions, which is one way the government helps people on lower wages to save more for their retirement.
With government co-contributions, if you earn less than around $58,000, you could receive up to $0.50 from the government for every dollar you put into super from your after tax pay up to $1,000. That could be as much as $500 extra in your super account each year. And the best part is you don't have to do anything to receive it apart from your annual tax return. The Tax Office will work out how much you're eligible to receive and payment is automatically made into your super account.
As you've seen, there are lots of ways to pay your super. To find out more or to make sure you're on the right track, make a free appointment with one of our experts. Just visit aware.com.au/book.
Attend a webinar or seminar to learn more
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