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
I totally agree. I think retirement is something we all should be thinking about (and planning for), even when we are in our twenties. Like you mentioned in this post, it’s better to start with small contributions while we’re young, instead of panicking 10-20 years down the line.
You have eloquently expressed and justified the point of “start early as it is less painful and stop procrastinationg about the desperate need to DO something about ones’ future”!
You explain what i and many others are trying to shake people up about! – To take it seriously and start earleir rather than later. It is so simple! Great posts. Regards, Paul
Thanks for reading, and the comment, it really is so easy and much more interesting than most people think 🙂
Great post. I recently started paying in to my pension due to the auto-enrolment that’s just been rolled out here in the UK. It’s never too early to start paying in!
Good on you! Prior to auto-enrolment, were employers still required to contribute to employee pension funds?
No, as it wasn’t a requirement for all employers to provide a pension. For example, my brother works for a small company who aren’t yet required to auto-enrol and a such he has no company pension. If a company pension scheme does exist then employers are required to contribute, with the highest contributions typically being made in public sector companies.
Reblogged this on WunWifey.
All the above assumes your retirement age will stay at 60 (or 65)…. have you considered that to govt just might tinker with the rules and extend that to 75 or 80 ?
When the pension was introduced the benefit age was set at 1 year after the average age of death…. today it is 14 yrs after average life expectancy….. is that sustainable ?
I’m investing outside super in growth assets that pay little income & therefore don’t pay tax anyway, and I get to control WHEN I can reap the benefits.
You raise a good point. I also invest outside of super (although I am a novice), although I see no harm with salary sacrificing an additional amount into my super fund.
Agreed! This is definitely something most people procrastinate and don’t realize until way later!
Great to hear you’ve started saving early – it will make an enormous difference to your standard of living in retirement.
The magic of compounding returns is really underappreciated.
Each dollar you do not save at age 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble.
Since a 25-year old should be saving at least 10 percent of their salary, this means that a 45-year old will need to save nearly half of his or her salary, *before tax*. Most 45-year olds will find this impossible after paying for living expenses, mortgage repayments and tax.
That is so fascinating and all the more encouraging! Thanks for your informative comment.
Wow! That is better than any business or employer gives to people here in some states & cities of the U.S. I was never able to get that like you talk about in Australia. That means that life will be very good for you later if you were to keep that job or in that company & move up in that company also. Benefits must be good there as that sounds like a great way to live in the present & future too. Employers here in states that have great technological companies have moved into china & other countries away from America. All the work here is nothing if working on computers or selling them too. I wish there were companies here with employers who had the nice benefits at least. Thanks for following my blog & reading my posts.
The fact that you have already put that much thought into your retirement is outstanding. I wish that more people in America and other countries alike would take care of their business and start planning early, rather than relying on handouts from others. I am like you, my mother is ill prepared for retirement… She thinks that because she has a government job she will be ready to retire in a few years when she hits 60, regardless of the fact that she has only been working for about 13 years now and she has never contributed a penny to her retirement fund. The government contribution for her job is 5%… I know she will be fine and she will get by without handouts, because she is that type of person. You will think yourself over and over again for being so wise to invest in yourself early.
Thank you for your kind words and sharing your story 🙂
I’m in an amazing situation in that I can start saving for retirement while I’m still in college, and if you do the math out it’s amazing how big the benefit for starting early is. If you assume that the average return of the (American) stock market and rate of inflation stays roughly the same for the next 50 years, every dollar I put in now will be more than $10 when I take it out in retirement. While it can be hard for most people dealing with loans to start so early, even people who have paid off their loans don’t put enough thought into the future.
The quote “Compound interest is the most powerful force in the universe” is incredibly true
Couldn’t agree more, never too soon
This is an excellent wake up call! This is the kind of thing I wish I’d learned in school, stuff that’s actually useful for the real world and real life!
I just found your blog and I totally agree with you. It is so important to think about the future. It took me some time to realize that living in the now is great for just that exact time, but it won’t make it any easier after retirement. Everyone should read this article, it is so helpful. Thanks.