If you’re 25 you’ve probably got 40 years ahead of you building your career. During that time you’re going to face life decisions – cars, travel, life partners, careers, houses, and family.
There’s one big ticket item that’s likely to be left to last, and that’s thinking about your retirement.
Most Australians save for their retirement through their superannuation, typically opening an account with the fund their employer suggests.
But not all superannuation is equal, and the decisions you make today in your twenties will decide the life you’ll be able to afford in retirement. Here’s why.
Youth have time on their side and compounding is a magic word, but act today.
In your twenties, you have a huge advantage over their older colleagues – that is you have time on your side.
On an average $80,000 wage, 40 years of employer super contributions at 9.5% could amount to $258,400 over that time. This number could be even higher if you factor in wage growth and a higher contribution from an employer.
The magic dust of ‘compounding’
Compounding is the other time-based benefit. Compounding is earning interest on interest, or for super, earning investment returns on investment returns. Super funds invest your super balance and then reinvest the interest, dividends, rents, and capital gains on your behalf. This means that in year two you earn returns on year one’s gains, and so on for 40 years.
By reinvesting a balance of $25,000 today, with 4% return after fees and taxes, that initial balance turns into around $115,000 at retirement. That’s compounding.
Putting these two together powerfully grows super balances. The time in super is what drives the value up so much and is what gives those in their twenties such an advantage.
It also is why it’s important at a young age to make the right decisions and not wait until you are 50 to start thinking about super.
3 things you can do to boost your super retirement savings
1. Making extra payments early in your work life
You are able to make additional payments (up to $25,000) over and above what your employer contributes to your super.
Putting an extra $50 into your super every month assuming a 4% p.a. return on your investment would give around $57,000 more in retirement savings – the $24,000 extra you put in plus another $33,000 you would have gained in compound interest over the years.
You do have to consider that you are tying money up in super until you retire, so that it won’t be available for houses, cars, holidays, family, etc.
2. Choose wisely
Some super funds give higher returns, others charge higher fees
How effectively your super fund manages your money and grows your balance is critical to your retirement lifestyle, and there is a massive disparity between the good, the bad and the ugly.
A mere 1% improvement in return can make a huge difference to the pace at which your balance grows. Returning to the earlier example where we used a 4% net return to see what it did to $25,000 over 40 years, when the return increases a mere 1% the balance moves up from $115,000 to $167,000.
The return figure you are looking for is the net performance return after payment of fees, as high fees will also erode your balance. Choosing the right fund, with strong long-term returns and low fees, is critical. The time to do that is now before you start to lose the advantage that time gives you.
3. Get into the right investment option
Superannuation funds offer a range of investment options and the ability to switch between them.
People are nervous about investments right now and could be inclined to minimise the damage by ticking the cash option. You might get it right short-term but the inclination is to set and forget, leaving the balance in the low return cash option for long periods. Longer term, a higher risk mix has historically performed more strongly (but it will not necessarily always be so).
The super funds generally have a default offer and it is usually a balance of higher and lower risk investments. They are the experts.
Traps you need to avoid
1. Don’t waste money by having multiple accounts
With every casual job you typically open another super account and end up paying administration and membership fees on multiple small accounts. A $100 fee paid five times is $400 too much. You need to consolidate all your super funds into one.
2. Don’t take insurance you don’t need
Often your super will include cover for life insurance in the event that something happens to you. If you have no financial dependents to financially protect then you may not need to insure against death right now. It’s worth weighing up the decision. You could add insurance down the track and save money in the meantime.
3. Ethical and sustainable investing appeals (but don’t pay too much for it)
Some ethical and sustainable investment options come with higher fees and/or inferior investment performance. With 40 years to go until you retire, you’ll pay dearly at retirement if you fall into this trap, and it doesn’t have to be.
Stay green, but seek out a fund that works for your long term financial wellbeing at the same time.
Don’t wait until you’re 50 to sort out your super. That’s too late and the damage is done. Now is the moment.