Superannuation in Australia - Why you should care about your super balance

"It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong"

 - George Soros

For most people under 50, superannuation is equivalent to a pot of gold that is not able to be touched until they are retired and in their 60s. Currently the rate stipulated by the government for compulsory super is 9.50%, with the view to increase by 0.5% each year from 30 June 2018 until it reaches 12%

Because of this extreme long term view, especially for anyone just starting out in their career or only a few years into their career, superannuation can seem like the last thing they should be concerned about. Admittedly, at the young age when you need to start thinking about responsibilities - buying a home, getting married and having a family of your own - super is generally not on the top of your priority list.

However, small changes now while you are young and have a long term horizon can significantly impact your ending super balance and thus your quality of life during your retirement years. It can mean the difference between holidaying every 6 months to exotic locations, or eating baked beans 5 days a week because the pension doesn't stretch far enough.

Assuming a person has gone to university for a standard 3 year degree, they enter the workforce around 21 or 22. If someone retires when they reach the age of 67, then that is 45 years worth of super contributions and your pot of gold has been compounding for 45 long years.

Let's say you're 25 and you decide to get serious about your super. At 25, you have probably 40 years worth of super contributions and work years in front of you. Check out the 2 graphs below to see just how much 1% difference compounded over 40 years can yield. We compare the difference of $500 starting balance, and monthly contributions of $500 each month over 40 years.

The difference is simply amazing for 1%. The money difference of getting a 6% return instead of 5% return is $234,534.80. Having that extra 234k, means that during your 20 years of retirement, you can draw income of over $50k a year. Not bad right?

$500 initial balance, with $500 a month in super contributions from the employer. Assuming 40 years of compounding at 5% growth rate

$500 initial balance, with $500 a month in super contributions from the employer. Assuming 40 years of compounding at 6% growth rate

So - what can you do to ensure you get that extra 1% return?

What I recommend, and what a lot of financial advisers recommend is that you structure your super in such a way that during your earliest years, you set your super investment option to the most risky option, and as you get older, slowly step down and change it to more risk adverse options.

For example:
20 -30 years old: Highest risk-highest reward option (Growth). Invest in property, Australian Shares, and International shares
31-40: Slightly less risky, but still growth portfolio. Still property, and shares, but more allocated to cash and other safer options
41-50: Moving away from shares and property and more towards annuities and less risky options (Balanced).
51-70: Most, if not all the money towards cash and the lowest risk options (Cash).

Your own super fund might call it different names, but in general they should be similar in name/type - they will definitely be sorted by risk profile of the portfolio allocation.

The reasoning behind this is quite simple: During your earlier years, you can afford to take big risks - you have 40 years where the money will be constantly compounding and you want the highest reward possible, so you'll inevitably assume the highest risk. But that is okay. It's better to have 70% chance of getting 6%+ return than a 100% chance of getting 3% return when you are in this age bracket. As you approach retirement age, it is more important to preserve your nest egg, so that is the reasoning behind moving towards cash as you get older. You simply cannot afford to have wild swings when you're that close to retirement as you don't have that same luxury of a long time horizon.

If you think you can predict the market and change to high risk during booms and then cash just before recessions, then you should be actively trading the markets and not worrying about super so much, because clearly you can predict the future. For the rest of us that can't predict the future and can't time the market, it makes sense to adopt the life stages approach as per above. During good times, you will buy less units with each contribution, but during bad times, you will buy more units. Overall it will even itself out over time.

Below is a screen shot of my super investment. I have it invested in the high growth option, which is the riskiest but also the highest chance of above average returns when the market is performing well. I am in the first age bracket and I have heaps of time to weather the storm in terms of the ups and downs of the stock market.

You'll notice from the pie chart, that my selection of this high growth super option has meant that my super fund has allocated less than 1% of my super portfolio into cash or fixed interest. It is almost completely made up of shares and other investment options that yield higher return than simply keeping the money in the bank. Over the last 12 months, I have been fortunate enough to enjoy over 10% return using this structure, and finger crossed that this rate of return can continue for the long term.


There are a few other things about super that not everyone may know about - one of the most important facts is that you can salary sacrifice additional super contributions at a reduced tax rate of 15%. I'm not going to go into specific details as these rules and thresholds are constantly changing - but know this; super is treated favourably if you are on the highest tax brackets. Why else would they cap the amount you can contribute at the concessional tax rate?

Also for those on lower incomes, such as students or part time workers, you can take advantage of the super co-contribution payments. Basically if you are a low or middle income earner, and make personal after tax super contributions, the government will make a co-contribution of up to $500 automatically and for free when you lodge a return. You just need to earn the money from a business or employment and earn less than $48,516 and less than 71 years old. For example, to get the max $500, you would deposit $1000 in your super after tax, and have to earn $33516 or less.

see https://www.ato.gov.au/individuals/super/in-detail/contributions/super-co-contribution for more info on the co-contribution.

Finally, one last thing to remember: if you change jobs and subsequently change your super fund, make sure to consolidate all your different super funds into the same fund to avoid paying unnecessary fees which can eat away at your profits/returns. On that note: if you had a choice of funds, look for those that suit your needs but also charge lower fees. It will certainty impact your ending balance if the compounding period is long enough.


Disclaimer: While every effort has been made to ensure all the information in this post is correct, you must not rely on it to make a financial or investment decision. Please make your own further enquires into this or consult a financial planner professional who can take into account your personal situation and investment needs. Everything above is general in nature and not a recommendation to proceed with a particular investment strategy.