Superannuation is something you simply cannot ignore. It is important that you engage with it throughout your working life, monitor how much you have and how it is invested. So, let’s take a look at how superannuation impacts you as it progresses through various life stages. From your first paycheck to the last, the contributions to your superannuation are building to finance your retirement.
First job
When you begin your first job, your employer is likely to direct your compulsory superannuation guarantee contributions into the fund that they use as a default (typically an industry superannuation fund). It is important to note you have the choice of the superannuation fund that is used and you do not need to accept the default, but if another choice is made, you will require providing detail of the fund to your employer.
Employers MUST pay superannuation to an employee at a rate no less than 10.5% of the ordinary time earnings if you are over 18 or if you are under 18, but working more than 30 hours in a week.
The superannuation guarantee is for employees irrespective of work conditions, whether they are full-time, part-time or casual.
Superannuation guarantees are typically paid from each pay cycle, however, employers may choose to pay at least every 3 months.
Early work years/young family
It is a long time before you can access this money by meeting a typical condition of release, but remember that it is accumulating for your retirement and you should stay on top of what is happening.
Make sure that you have all your contributions going into one fund. When you commence a new job, you need to advise your employer of the fund details so that contributions continue to go into said fund. In most cases, you will have a choice as to where your contributions are paid but possibly not if you are a government or university employee. If you think a job has paid to a different fund, search for lost superannuation and roll them into one. Fewer admin fees mean more returns for you.
Check your statement each year:
- How much have you paid in administration and other fees?
- What has the performance been and can you compare it to another fund to see if it is keeping up?
- Is the chosen investment option still the right one for you?
- Are you paying premiums for insurance?
- Is the insurance sufficient or should you obtain other insurance possibly outside superannuation?
- Do you have a current beneficiary nominated?
This period in your life is likely to be the most financially challenging – marriage, children, mortgages and your career. For women, there may be a period out of the workforce while raising children and it is worth exploring paid parental leave with your employer to ensure you continue to build your superannuation for retirement through this period.
All of these issues mean that you may not be able to add to your superannuation from your resources and paying down your mortgage will be the highest priority, but you should attempt to allocate an extra amount to superannuation from your salary each pay period. Settle on a small amount you will not miss, even if it is $10 each week. As you age, try to increase this amount (i.e. if you get a pay rise, add extra to your superannuation contributions). The most tax-effective way to contribute is via salary sacrifice – pre-tax salary, but you can also add from your resources.
You might consider seeing a qualified professional to review your financial situation and help you reach your future goals. If an industry fund is in use, does it meet your requirements? Do you want more say in your investments? Does the industry insurance meet your requirements?
In your 50’s and 60’s – approaching retirement
By now, your financial situation should be a little easier. Perhaps the kids have finished university/have jobs and left home and your mortgage is well under control (provided the interest rates do not stay up). Your superannuation balance will look healthy, and guess what, retirement isn’t so far away any more.
If you have not consulted a qualified professional, now is a good time to set some financial strategies in place so that your future needs can be met.
You might be thinking of some things you would like to do when you have more time and travel may be on top of the list.
Now is the time when you need to contribute as much as you can spare and that you will not need before you reach ‘preservation age’ – the age at which you can begin to draw from superannuation. For most people that is age 60.
Using salary sacrifice now will be a strategy that will work well for you. Part of your pre-tax salary is contributed to superannuation, and your take-home pay and the tax you pay personally will be reduced by maximising this amount if your budget permits. There are other strategies for higher-income earners, perhaps with a non-working spouse. These include spouse contributions and contribution splitting.
In retirement
Now you have retired and are living off a pension drawn from superannuation. Once commenced, you must draw a minimum percentage from superannuation each year. At 65, this is 5% of your balance, but you may need to draw a greater amount (note the minimum in 2022/23 was reduced by the government to half of this amount due to the COVID-19 pandemic but it is to increase back to 5% from 1 July 2023).
It is vital that you manage your superannuation, or have it managed by a qualified professional so that what you have will last you for at least your life expectancy. A male at age 65 can expect another 18.5 years based on typical life expectancy, so you need to watch and plan your spending. At the time of writing, a couple wanting to live a comfortable lifestyle will need about $68,000 per year between the ages of 65 to 84. This means that you will need to have accumulated nearly $640,000 to meet this need, along with receiving Centrelink age pension and that takes you to your life expectancy (Source – Association of Superannuation Funds of Australia – ASFA).
What happens if you live longer than your life expectancy? What happens if you need aged care?
These things mean that you will need to accumulate a greater amount of savings through your working life so that these needs in later life can be met comfortably and without placing stress on yourself or your family. The alternative is to reduce your expenses below the comfortable expenses target to something more in line with a moderate standard according to ASFA requiring around $44,000 per year for a couple. Taking care of your superannuation through your working life will benefit you at the time that it is most needed.
Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.
