Superannuation in your 20s and 30s is commonly a least considered financial asset. Numerous studies show that the earlier you commit to a savings plan (such as superannuation), the better the outcome you will have.
A typical reaction to a discussion about Superannuation amongst this cohort is that ‘Super is for the oldies!’. Most of you will have realised by now – old age is the destiny of most of us! So, what to do about it! We know that the average 25-year-old has around $10,000 in super in 2024. We also know that the likely goal for that account in 40 years, will exceed a million dollars – so how do you get there? You should be aware of the long-standing investment truism, that small, consistent steps will make the attainment of that goal easier. The decisions you make and implement now, could earn you hundreds of thousands of extra dollars over your working life.
As you move through the 30s, you may be dealing with life-changing issues. The big life-changers at this stage are generally starting a family; and developing a career. The family, often accompanied by a home mortgage, comes with a financial commitment – hopefully offset somewhat by increased salary from promotions. Good savings habits established (or lessons learned) during your 20s will stand you in good stead in this decade. With all of this background, can you really properly consider your Super investment?
We consider some typical circumstances later in this article but encourage you to be methodical and disciplined throughout. The information we present in this article should be considered cumulative. Regardless of when you start the superannuation journey, the rules are consistent – and the investment truisms compound.
How does your Super come about?
Without getting too technical, there are a couple of ways to accumulate superannuation contributions. The first – and most common – way, is that every employer has statutory obligations to make guaranteed super contributions for their employees. They must pay these contributions into a fund of your choice – or into an approved ‘default’ fund (of their choosing). Regardless of which Super Fund you opt for, the second line of contributions is personal. (Personal Super contributions may or may not be tax deductible for you).
Each quarter, your employer should be paying at least the statutory minimum percentage of your income into your super fund. Personal contributions can be made at a frequency that suits you. Interestingly, regardless of what contributions are made to your Super account, you can instruct the trustee as to how you want your funds invested. We’ll talk more about these aspects of Super in a later article, so, watch this space.
If you don’t know if your super is being paid, or the fund it’s being paid into, ask your employer. If you think you’re missing out, search ‘unpaid super’ on the tax office website to see what you can do. This is your money.
Have you got more than one Super Fund?
Many younger people work casual shifts at a series of employers, some sequentially, others multiple jobs in the same period. If you have had multiple jobs during your teen years and while entering adulthood you may have multiple Super accounts. Recall what we said above about employer obligations!
There is a risk to your super well-being if you have multiple low-balance super accounts. The money may quickly be ‘wasted’ on fees and on premiums for default insurance. You can fix this fairly easily by combining your super into one account. You can choose the account into which to amalgamate. A word of caution though: be aware that existing insurances have inside your super may be lost when you roll over your funds.
More on default insurance within Super?
Your Super fund could be paying for insurance you don’t really need just yet. This can happen because of insurance cover applying ‘by default’. If you have no financial dependants at this stage of life, you may well not need life insurance – and premiums reduce the amount accumulating for your retirement. You could cancel unnecessary insurance cover and leave more money in your account to boost your savings. You shouldn’t overlook funding life insurance protection through super if you have deemed it necessary for you.
Is Superannuation in your 20s and 30s working for YOU?
Your money is locked away in super for some decades, ensure it is invested appropriately for your current circumstances. Most funds offer a range of investments that give you an opportunity to invest according to your investment risk profile. Remember that all investment portfolios perform differently: it is important that you feel secure with your investments.
An investment choice that is expected to produce higher returns over the long term can bounce up and down in value. Some years it may even go backwards in value. Sometimes these movements can be rather extreme. ‘Safer’ investment options usually produce lower long-term returns – but they may allow you to sleep better at night.
What are your lifestyle and financial needs?
Buying a new car, travelling, having fun, getting married, buying a house, acquiring lifestyle assets, starting a family. The wish list of exciting things to do with your money other than sticking it into super is extensive – and distracting. Some not so fun facts to consider:
End-goal financial needs
If your parents/ carers retired in 2023, they needed a minimum of around $62,828 per year to enjoy themselves. By ‘enjoy themselves’, we mean not having to worry about how to fund the basics of life (food, clothing, shelter, entertainment and some travel) – and assuming they have no mortgage debt. If that doesn’t sound like much now, by the time YOU retire we estimate that inflation could have pushed that annual amount to around $220,000 (in 2065 dollars).
How long have you got
Current life expectancies would indicate you’re going to live much longer than your parents and grandparents. Can you imagine living for 30 years without earning an income? A strategic investment plan, designed to make your super work hard within your personal circumstances and constraints, will help substantially. Taking appropriate action while you’re employed will be the difference between enjoying those decades and surviving on a government-funded pension.
(At the time of publication, the full Age Pension for a married couple stands at $1,538.60 per fortnight, plus Supplements. This will be increased by an indexation factor each 20 March and 20 September.)
Start now
Starting early and adding a bit extra when you can makes a big difference. Due to the compounding of interest over time, if you start now by making an extra pre-tax contribution of just 1% of your annual income to super (subject to contribution cap limits), continuing this small extra contribution as your salary increases will add significantly to your super fund balance by retirement.
(You can do the maths on your salary, but if it is say $70,000, a 1% salary sacrifice to Super – $700 – will reduce your take-home pay by less than $500 after allowing for the tax deduction. Your superannuation balance will increase by $595 after the government take the contributions tax on it. In this one act alone you will have made around 20% on your investment. From then on, any earnings by your personal contribution will only be taxed at 15%, whereas if invested outside of Super, the rate of tax would exceed 30%.)
So, still find super boring? That’s okay; you’re not alone. But let’s consider some other factors:
Time-constrained financial goals:
Short-term wishes
As you progress along the earnings curve, this couple of decades are a great time to sock away money that is excess to real needs. Funds to be used in the time between now and when you can legitimately access your superannuation should not be invested through your Super account. At this stage of your life, super is a VERY long-term investment. During this phase, some short-term goals might include acquiring lifestyle assets, a deposit on a home, paying down a mortgage, setting aside funds for future education needs of children. This should be a time when career progression is providing you with increased income before some of those big events roll in.
…and while all of this is going on, you need to keep your eye on the long-term. Every action taken now, will impact your financial future.
Long-term needs
We mentioned above that a 25-year-old today will need to target an annual income of around $220,000 in 2065, to fund a comfortable retirement. Comfortable that is, by 2023 standards. The target is a little lower for the 35-year-old of today: they will only need to accumulate assets to provide an income of a little over $160,000 (in 2055 money). The problem is that unless they have made a sufficient start to the accumulation, they now have 10 years less than the 25-year-old to achieve the goal.
Whilst the 25-year-old will have a 10-year start on the 35-year-old with their salary sacrifice plan over the past 10 years, the 35-year-old will have to up the ante somewhat. The goal may still be achievable, and the contributions added to the employer’s contributions may be even more cost-effective. (For example, a salary sacrificed contribution of say 2% of a $150K salary, will be $3,000. That level of tax deduction could actually cost only a little over $2,000. And the net gain in the Super Fund would be $2,550 – resulting in an approximate 25% return on the transaction.
Earnings on you Super nest egg
We mentioned earlier that your Super account accumulates with contributions made from different sources. It also grows by being invested in assets that will either generate an income, or that have the potential to grow in value. Whether or not you can make additional contributions to your Super there is an important step you should take. You owe it to yourself to ensure that your super is invested in an appropriate portfolio. Because you don’t want to be kept awake of a night worrying about superannuation investments, your portfolio choice is imperative. So, what is an appropriate portfolio?
The key assets in an investment portfolio within, or outside, the super environment are shares, property, fixed income (bonds), and cash. Shares and property, and ‘derivatives’ of those assets are classed as Growth assets. Bonds and Cash are classified as Defensive assets. A portfolio weighted toward Growth assets is likely to out-perform one that is dominated by Defensive investments over the long-term. However, be mindful: higher returns are usually associated with higher risk.
Some government assistance?
Another option for lower income earners to explore is the government co-contribution. If you are eligible, and if you can afford to contribute up to $1,000 after tax to your super, you could receive up to an additional $500 contribution from the government. Or to keep your partner’s super humming along while she or he is earning a low income, you can make a spouse contribution on their behalf and gain a tax offset of up to $540.
Let your super pay for insurance
For any family – particularly with young members, financial protection is comforting and assuring. The loss or disablement of either parent could be financially disastrous. In most cases, it is wise to have both parents covered by life insurance, and disability insurances. Disability insurances include Total and Permanent Disablement, and Income Protection.
These insurances may be able to be taken out through your superannuation fund, leaving you with better budget cashflow. However, the premiums paid out of your accumulated super balance will ultimately affect your retirement benefit. If you choose to go down this path, don’t just accept the amount of cover that your funds automatically offers. It may not be adequate for your needs. If you are not familiar with the intricacies of life insurances, you might also want to seek advice as to the policies that best suit your needs.
What you should do now
Whether it’s super, insurance, establishing investments or building your career, there’s a lot to think about when you’re in your 20s and 30s. It’s an ideal time to start some serious financial planning, so talk to one of our experienced financial advisers about putting a plan into place so you can have everything sorted, for now – and for the future. Our team is available for a meeting: either complete and submit the Contact Us form on our website or click on the Book A Meeting button above.
(This article was first posted in March 2024. It may occasionally be refreshed/ updated.)
