Firstly, What Exactly Is Super?
In its purest form, superannuation or ‘super’ is a fantastic concept and has been (in most cases) tremendously successful since its inception in 1986. Basically, the folks in Canberra decided it wasn’t viable for them to keep making pension payments to so many retirees. Especially as our population ages. They also didn’t trust everyday Australians to save enough for their retirement. They needed a long term solution to ensure a comfortable retirement for as many people as possible – and that’s when Superannuation was introduced.
The goal wasn’t to make sure everybody had enough for retirement (this is unrealistic), but as many people as possible. This is so that the Government can minimise the amount of Australians who can claim the pension. Before you call them cheap skates, this allows the Government to spend additional money elsewhere such as on education, roads or public health.
For the system to work, employers contribute a small portion of their employee’s wages to a superannuation fund chosen by either the employer or employee. Currently, employers need to contribute a minimum of 9.5% of their employee’s gross wages to superannuation. Your super fund then invests on your behalf into a diversified portfolio of assets like shares (local and international), bonds, property, and cash. That portfolio is designed to compound your retirement nest egg over the course of your working life. The genius behind this concept and the reason it has been hugely successful is because you can’t touch it until you retire. This means you are letting your investment returns compound over time, as you literally can’t withdraw any funds from your account (unless you prove that you’re going through extreme circumstances).
The Worrying Relationship Between Young Australians And Super
Millennials in comparison with older generations are extremely disengaged with their Super. Some Millenials don’t even know exactly what Super means and where that percentage of their pay is going. According to the Financial Services Council, millennials are 3x less engaged in their Super in comparison to their elders. While this may not come at much of a surprise, this is a much bigger problem than what people think. “I’m not retiring for another 40 years, I have plenty of time to worry about my Super!” I hear you say.
The reality is that it’s crucial to get the foundations of your super fund right as early as you can. This is so that you let compound interest work its magic over the longest amount of time possible. Also, 30% of Australians under 29 have more than one super account! This means two sets of fees every year!
The Most Crucial Thing All Millennials Must Know About Their Superannuation
Most Australians get their first Super account opened once they get their first job, or (by law) once they begin earning more than $450 per month before tax. What all millennials must know is that once they get their first super account, most (if not all) major super funds automatically place you in their balanced/default option.
While this might sound reasonable, balanced super funds spread your money across a wide range of assets, not just stocks. Over the very long term, history tells us that this drags down a funds’ retirement savings significantly. To learn more about the performance and risk profile of each asset class, check out the article I published about asset allocation.
How Much Can It Cost Future You If You Leave Your Super In A Balanced Fund For Your Entire Career?
According to Superguide.com.au, the average return of balanced super funds over the past 10 years is 6.4% per annum. High growth funds on the other hand, which invest your savings solely in stocks, return an average of 8.8% per annum. If you extrapolate these figures over a 50 year period, the results are staggering. For this example, let’s assume you’re 18 years old and begin with a balance of $1,000 in your super fund, and you contribute $100 a month over a period of 50 years. To keep this as simple as possible, we’ll remove fees altogether. This is actually doing balanced funds a favour in this example, because their fees can be 10 or even 20 times more expensive!
After 50 years, at the age of 68 you will have a balance of $420,436. If you are invested in a high growth super fund that invests only in stocks however, with an average interest rate of 8.8%, at age 68 you will have a balance of a staggering $979,20!. That’s an extra $558,765 – more than double your money if you would have spent the time in a balanced fund. You can literally more than double your super savings simply by spending 5 minutes talking to your super fund and asking about switching to a super investment option solely focussed on shares.
|Balanced Fund||High Growth Fund|
|Total Profit After 50 Years||$359,436||$918,201|
|Total Savings After 50 Years||$420,436||$979,201|
Disclaimer: Shares (equites) have historically been proven to be relatively volatile over the short and medium term. For this reason, it’s worth considering switching to a more conservative investment option when you are nearing retirement, which may slightly lessen your balance upon retirement.
My Final Take
I’m a huge fan of superannuation as a concept. It is one of the most brilliant initiatives that the Australian Government has introduced that has benefited both retirees, as well as the Government itself as they are making much fewer pension payments. I’m concerned however that too many young Australians aren’t taking their Super seriously (and sometimes forgetting about it altogether), at a time when it is most important to do so!
In difficult times like this, it’s critical for young Australians to ensure that their future is looked after. It can take you as little as 5 or 10 minutes to see what other investment options your Superfund offers that (based on historical data) can more than double your returns while significantly reducing how much you are paying on fees.
Before changing your investment option however, it may be best to talk to a licensed professional who can take your personal situation into account. While Super is a fantastic initiative, in theory, there are still funds and fund managers out there that are taking everyday Aussies for a ride. And that’s what we want to change! it is important for us Australians to take advantage of our Super and harness the power of the stock market. If you do, it can provide a comfortable retirement to share with our friends and family in the future.
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Disclaimer: This website (the “The Money Pal”) is published and provided for informational and entertainment purposes only. The information in this Blog is general in nature constitutes the Content Creator’s own opinions. The information in this blog should not be regarded as financial advice.
Christian is a passionate and devoted financial writer. His love for finance originated during his time at University where he studied business, economics, and finance extensively. Christian is keen on consistently improving his knowledge on investing and personal finance, whilst also making the topic more of a prominent talking point amongst Millenials. Christian finds his happy place having a yarn about all things finance, current affairs, and his beloved Collingwood FC over a few independently owned craft beers.