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The more your super grows, the more you’ll have when you retire.
Here we’ll look at how the money in your super grows, how compounding can help super grow faster, and how you may need to change your investment options as you get older.
We’ll also look at ways to give your super an added boost, with salary sacrifice, additional contributions and consolidating any other super you might have.
Let’s get started. Money in your 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 half of your super balance could be from your own contributions, and the other half from these compounded investment earnings.
The power of compounding can significantly increase the final value of your super.
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 are reinvested, and those earnings also make money, in just ten years that $10,000 climbs to almost $26,000
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 your super fund in what’s called the “default investment option”.
At Aware Super, our default investment option is called “MySuper 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, risk is slowly reduced, to take a more balanced approach. This can help safeguard your savings – to help you retire with more.
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, 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 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.
Diversified options include conservative growth, balanced growth, diversified socially responsible investments, growth and high growth, and they have a range of risk and potential returns.
Now here’s a chart that shows how investment options with different risks performed over time.
The red line at the bottom shows the performance of cash investments. Cash is a low-risk investment, and this shows in its steady but slow progress.
$100,000 invested in cash in 2011 was worth around $110,000 ten years later.
Compare that to our Balanced Growth option, which grew to around $190,000. And as you’ll also see, that growth encountered some ups and downs along the way.
Finally, our high growth option, which climbed in value to an impressive $250,000. You’ll notice the ups and downs are even bigger here.
Choosing investment options is about balancing this relationship between risk and growth potential, which can change over time. Which is why more than 85% of our super members choose to stay in our MySuper Lifecycle option.
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
- Govt co-contributions
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.
Meet Jessica. Jessica is 34, earns around $55,000 a year and has almost $55,000 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 per fortnight. And when she turns 57, she increases it again to $200 per fortnight.
Over the years, until she retired at 67, the total of Jessica’s salary sacrifice contributions was over $118,000. But because of compounding, her final retirement balance grew $160,000 more than if she hadn’t salary sacrificed.
As an added bonus, because Jessica’s taxable income was reduced, she also saved on average $573 a year in tax- that’s almost $19,000 in total over the years!
Let’s look at another example.
Jacob is 42, earns $95,000 a year and has $90,000 in super.
Through salary sacrifice, he begins adding $100 a fortnight. On his 52nd birthday he increases it to $150 per fortnight. And when he turns 57, he boosts it to $500 per fortnight.
When he retires at 67, Jacob’s total extra contributions are $165,500. But because of compounding, his final retirement balance grew $192,000 more than if he hadn’t salary sacrificed. And, like Jessica, salary sacrificing reduced Jacob’s taxable income.
This saved him on average $585 a year in tax- or over $14,000 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 may 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 de facto 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 to stay 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.
Ok, 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 $57,000, you could receive up to 50 cents from the government for every dollar you put into super from your after-tax pay – up to $1,000. That could mean 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 grow 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
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.
Ok, 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 into your 90s. 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 $320,000 in super.
If you think about that amount needing to last until age 95 – as an annual income it will be around $17,000 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 Age Pension. This could mean up to an additional $25,000 a year. Through her retirement, Government Age pension payments will make up 60%, and super will make up 40% of Tina’s retirement income.
Ok, 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 3 biggest expenses are housing costs, such as rent, 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 Health Services and Leisure activities, such as travel.
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 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 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 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 $7,000 more each year.
Over time, this could add an extra 15% to your total savings.
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.
We’ll start with combining, or consolidating your 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 $65,000 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 $520,000.
However, if Susan puts an extra $10 a week into super, with salary sacrifice, she’ll retire with $25,000 more.
And with $30 extra a week, she’ll retire with $594,000. That’s $74,000 extra to enjoy in retirement - tax free.
Susan will also reduce her taxable income by doing this, 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 50 cents from the government for every dollar up to $1,000 you put into 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 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 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
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