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Superannuation; Contributing to superannuation

Starting early is the key to building super balances

Chris Morcom
Partner/Private Client Adviser
11 Aug 2014

A common strategy for building wealth is the use of compound earnings, yet this concept is generally not well understood until later in life… when arguably you have less time to take advantage of it.

Australia’s superannuation system is structured for people to accumulate wealth during their working life so as to provide an income for the time when they stop work.  It is a long term system, and most funds are designed to ensure their members benefit from the compounding of returns.

The benefits of contributing a little bit extra to superannuation over your working life are huge.  Sacrificing a small amount of your pre-tax salary towards making additional superannuation contributions can turbo-charge your retirement balance.  It is a strategy that is not used often, yet arguably can make the most difference to your lifestyle in retirement.

Using some of your pre-tax salary to make additional contributions to superannuation also provides you with an income tax saving along the way.  For example, someone earning $50,000 per annum and contributing 10% of their salary ($5,000 per annum) to superannuation by way of a salary sacrifice arrangement would see a personal income tax saving of $1,725 each year. 

However, the impact over the longer term is more important.

Take for example a person starting work at 20 years of age on a salary of $45,000 per annum. 

The table below shows the difference between making no extra contributions to superannuation, and contributing 5% or 10% of salary to superannuation via salary sacrifice.  Over a 45 year working life, the amount that can be accumulated in superannuation almost doubles.

However, if you waited until you were 40 years of age, and then started salary sacrificing, the amount that could be accumulated by your 65th birthday would be significantly reduced. 

The table below illustrates the significant reduction in superannuation balance, even if the person was earning $120,000 per annum at 40 years of age.

The above projections are all based on the super fund earning 8% per annum after costs, pay rises of 5% every year, and inflation of 3% per annum.  Lower rates of return (or higher costs), or lower pay rises and lower contributions result in a much reduced amount of superannuation accumulated.

While waiting until you are 40 to start contributing to superannuation is not fatal to the accumulation of money for your retirement, it may impact the kind of life you lead once you finally hang up the tools. 

If you want to ensure you have sufficient wealth to fund your lifestyle when you are not working, it might be time to consider contributing extra to superannuation.  Prior to taking such action, speaking to one of our professional advisers would help you target the right contributions to help you achieve your own goals.

The information above is general advice and you should also seek appropriate professional advice prior to implementation of any strategy.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.