There are no ifs or buts about it, you’d be mad not to develop a super savings plan and get advice about whether additional contributions to super (in addition to your employer’s contributions) are appropriate for you.
Salary sacrificing and making additional super payments is one of the easiest ways to secure a comfortable financial future. It’s a kind of forced saving as access to your super is restricted. Over the longer term compounding interest can really add up, but watch the management fees. It may seem like a small slice of the pie now but over 30 plus years even one percent in annual fees can really add up.
Compound interest
Compounding is the process of reinvesting your returns which then also earn additional interest for you. Compounding has been described as the eighth wonder of the world because it is so effective in helping you to build wealth. Through compounding, your money makes money, which makes more money, which in turn makes even more money. The longer you leave the compounding process in action, that is, while you keep reinvesting your money into the investment and not drawing it out, the more money you will have; it’s literally that simple.
Here are some examples to help you better understand how time can be of benefit when you are saving for the long term. Let’s examine three types of investors:
- Smart Saver invests $50 per week for 10 years, starting at age 25.
- Late Saver saves $50 per week for 10 years, starting at age 35.
- Hard Saver invests $50 per week from age 35 until retirement at age 65.
Long term savings benefits
Both Smart Saver and Late Saver invest a total of $26,000 over 10 years while Hard Saver invests a total of $78,000 over 30 years. All Savers earn the same return – 10% pa after fees and taxes. All Savers reinvest their earnings.
Age Smart Saver Late Saver Hard Saver
25 0 0 0
30 $16,627 0 0
35 $43,371 0 0
40 $69,849 $16,627 $16,627
45 $112,493 $43,371 $43,371
50 $181,171 $69,849 $86,386
55 $291,778 $112,493 $155,571
60 $469,912 $181,171 $266,849
65 $756,798 $291,778 $445,830
The figures highlighted in white represent the years when the Savers contribute $50 per week.
The table shows that in the end, Smart Saver has accumulated the most. Even though Smart Saver and Late Saver invested the same amount, Smart Saver ends up retiring with over $460,000 more than Late Saver and over $310,000 more than Hard Saver – purely due to the effects of time and compounding returns.
Should you contribute more?
Government co-contribution
If you contribute extra from your “after-tax” income, you don’t have to pay contributions tax on those extra contributions, and they get more favourable tax treatment when you retire. Also you may receive a Government contribution.
For example (see table) Bill has $20,000 in super at aged 35 and a gross salary of $29,750, and is eligible for the co-contribution. By adding an extra $1000 after-tax, the table shows the difference.
For higher income earners, if your employer allows you to contribute extra from your pre-tax income, you can also benefit. (If you are eligible to receive a Government co-contribution, you may be better off making after-tax contributions. This applies if you earn less than $58,000 each year.)
Superannuation contribution
After 10 years After 20 years After 30 years, at age 65
Employer’s 9%
contributions only
$55,000 $107,000 $182,000
Employer 9%
plus an extra
$1,000 after-tax
contributions,
with $1,500
co-contribution
$82,000 $169,000 $291,000
