Superannuation - How to make it work for you

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:

1. Paying directly into your spouse’s super fund using after tax dollars, such as your take-home pay or savings, or
2. 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