Part 1: Superannuation — what is it and why should I care?
Superannuation. It’s a hot topic often shrouded in mystery and misunderstanding because nobody ever really educates us on what it is, beyond being told it’s a ‘retirement nest egg’.
We’re first introduced to it when we’re handed a form to fill out with little to no explanation from our employer. Next, we see it mentioned on our payslip (when we bother looking at it). We occasionally receive a letter in the mail from our fund/s talking about things like performance and fees, which frequently finds its home in the recycle bin. Finally, we hear about it on the news when it’s discussed in overly complex terms by the Government. Hardly makes us feel engaged and interested, right?
The interesting thing is that no one really talks about it and, even more interestingly, no one seems to care.
I’ve been giving some thought to this and realised that no one really educates us on this stuff (or financial literacy in general for that matter, which is a much bigger problem that I am making my mission to address). With that in mind, welcome to my superannuation series blog, where I’m going to be breaking down each component of super so that you can get educated and get interested. After all, it’s your money we’re talking about, so you absolutely should care.
Let’s start from the top — what is it?
Superannuation, or ‘super’ as it’s commonly called, is an investment with the specific purpose of being used in retirement. A forced retirement savings plan if you will.
It grows with ongoing contributions made by your employer over your working life (called Super Guarantee Contributions or ‘SGC’), which are currently mandated at 9.5% p.a. of your annual income. That means if you’re earning $60,000 a year ‘plus super’, $5,700 (9.5% x $60,000) is getting contributed into your super fund every year by your employer on your behalf.
There are lots of super funds out there and it can be confusing to understand how they work. ‘Accumulation’ super funds, which are used by most of the employed work force, are very similar to Managed Funds, which are just investment funds offered outside the super environment. They’re managed by professional fund managers and typically have around a handful of investment options you can choose from, which generally range from ‘cash’ to ‘high growth’. Understanding the differences between investing inside vs. outside super, as well as choosing an investment option are much too important to reel off in a paragraph so I’ll be addressing this later, it’s just important to know the basic principles for now.
Next we move on to why is it important?
There’s a common misconception with millennials and super, which is the idea that super isn’t worth caring about because by the time we get to retirement age, the Government will have changed all the rules and probably taken the money for themselves anyway.
I cannot write more emphatically that this is just not true.
Don’t get me wrong, there’s every likelihood that super legislation will have changed by the time we reach retirement (probably multiple times, as legislation does). It’s important to know however, a major reason employer super payments were made compulsory was because the Government recognised with our growing population that paying the Age Pension to every retiree on an ongoing basis is financially unsustainable. So it’s not a question of whether our super will be there to support us in retirement, it’s more a question of whether the Age Pension will.
Further, let’s say the Age Pension does stick around. If you’re planning on relying solely on the Age Pension for your retirement income, you may want to reconsider.
The ASFA Retirement Standard estimates that living a ‘modest’ lifestyle in retirement will cost a single person $27,987 p.a. and a couple $40,440. A ‘comfortable’ lifestyle in retirement is estimated to cost a single person $43,901 p.a. and a couple $62,083.
Contextually, a ‘modest’ lifestyle means no budget for home improvements, budget haircuts, needing to actively watch utility costs, only one domestic holiday per year (forget international travel) and owning an older less reliable car, to name just a few.
Meanwhile, the maximum Age Pension including all eligible supplements currently sits at $24,551 p.a. for a single person, or $37,014 p.a. for couples.
That’s right, it’s estimated that relying solely on the Age Pension in retirement won’t even provide the basic funding to fix home problems like a leaky roof, repair your car if needed, or allow you to run the heater all winter if you’re cold. Probably not the lifestyle most people dream of in retirement, right?
There is of course the additional option of building enough capital outside super to fund your retirement. If that’s your plan then that’s awesome, because it means that when you retire you’ll have TWO income sources to rely on — the one you’ve built, plus your full super balance.
Regardless of whether you’re planning to depend on your super in retirement or not, your employer will continue making contributions on your behalf for the rest of your working life. Plus, whether you feel it or not, this is YOUR money we’re talking about! So get interested and get educated, because it’s your future in the balance, and whether you have financial freedom in retirement or not is entirely in your hands.
References
https://www.gesb.wa.gov.au/members/retirement/how-retirement-works/cost-of-living-in-retirement
https://www.superannuation.asn.au/ArticleDocuments/269/ASFA-RetirementStandard-Summary-2018.pdf.aspx?Embed=Y
https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get#a1
