I seem to have a lot of readers from the United States, so I thought it would be useful to provide a brief and generalised overview of Superannuation arrangements in Australia before I launch into my musings.
Superannuation in Australia
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% as at July 2013 however this is set to increase incrementally and very gradually, to 12% 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.
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.
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.
Salary Sacrificing into my Superannuation Fund
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%. 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.
How much will I need for retirement?
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% (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 $80,000.00 (as at March 2015) 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 26 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 was lucky though to have an employer that pays well above the minimum legislated superannuation contribution, for around 3 years. I was also conscious however, that I wouldn’t be working for this employer for my entire career. I changed jobs in March 2015 and am back to receiving 9.5%. 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.
That Career Girl