Superannuation: Understanding the basics
The amount of time spent thinking about and planning for retirement is often linked to how long you have been in the workforce. For those approaching the end of paid employment, it’s probably top of mind, but in the early years of your career, retirement may be too far away to be of much interest. Whatever stage you’re at, the message from financial experts is clear: the earlier you start contributions, the healthier your finances are likely to look down the track.
We’ve put together a collection of frequently asked questions about superannuation to help you get your head around the basics.
What is superannuation?
Good question! Superannuation (commonly referred to as ‘super’) is the money contributed by your employer during your working years to help fund your retirement. In the buckets of short- and long-term investing, super fits into the extremely long-term bucket.
In Australia, how much an employer contributes is set by the superannuation guarantee, legislated and controlled by the federal government. From July 2022, the superannuation guarantee stipulated a minimum of 10.5% of an employee’s ordinary time earnings must be paid into their super fund. Individuals also have the option to make additional contributions on top of the amount paid by their employer.
Why do I need super?
When you reach retirement age and decide to reduce or end your paid employment, you will need an income to live on to ensure you are able to cover the cost of life’s essentials, as well as enjoy the ‘nice to have’ experiences. According to the Australian Bureau of Statistics (ABS Life Tables 2018-2020), today’s 50 year olds will live around 20-25 years beyond the retirement age of 65 – which means once paid work comes to an end, a new income stream is required.
Remember, superannuation contributions are your money and the superannuation system is designed to set you up for a more financially comfortable lifestyle in retirement. If you make regular payments into your super fund over your working life, on top of the contributions made by your employer, more money is invested with more potential to grow.
When the time comes to call it quits as a worker, the money you’ve saved over the years in super will be used as your retirement income. You may also have other income-producing assets such as shares or property. These combined incomes can be used to pay your mortgage (if you still have one), keep your car on the road, cover the cost of private health insurance or fund that long-awaited overseas trip.
When should I start contributing extra funds into super?
As soon as you can! Any contributions you make on top of your employer’s mandatory contributions are added to your super fund and invested in a range of investments including cash, fixed interest, equities and property. Any returns on these investments of your funds will help grow your super balance. One important note is that as a long term investment, there will be times when your super investment portfolio grows and times when it does the opposite. This is usually not cause for concern as the performance will reflect what’s happening in the broader investment market – similar to the way shares go up and down in value over time.
If you are concerned about the performance of your portfolio, arrange a meeting with your fund manager and discuss your investment options.
If I want a comfortable retirement, how much will I need?
The amount required for retirement is different for each individual and household as it depends on the current financial circumstances of those involved. Many factors determine how much you will need to save to ensure the retirement lifestyle you desire.
How much you really need to retire in Australia depends on the shape of your finances at retirement age. As a guide, there are a couple resources that can help you plan for the retirement lifestyle you desire.
The Association of Superannuation Funds of Australia (ASFA) estimates singles will need a minimum of around $46,000 each year to fund a comfortable retirement and couples will need around $65,000 per year. As a lump sum this equates to $545,000 for singles and $640,000 for couples. Super Choice has slightly lower figures at $301,000 for singles and $402,00 for couples with both ASFA and Super Choice estimates assuming the retiree owns their home.
How much should I have at my current stage in life?
If you’re wondering whether or not you’re on track to meeting your retirement savings goal, a retirement calculator will give you a sense based on your age, income, current super balance, employer contributions and other factors. Bear in mind, however, that your situation will change over the years so remember to check how your super is tracking on a regular basis.
Humaniti can help you get a handle on your overall financial position by providing an up to date view of your net worth. When you securely link your banking, share trading and superannuation accounts and add any other assets and liabilities, you will have a realistic view of your financial state affairs. You will also see how your super balance compares to other Australians like you and be able to monitor how you’re tracking over time. You may decide it’s appropriate to make additional super contributions to help set yourself up for a more comfortable retirement.
* Disclaimer – the information in this article is general in nature and does not constitute financial advice.