It’s common that many young Australians consider super and retirement as something they will deal with when they get older, with some delaying their interest and engagement for their ’50 something-year-old’ self to deal with.
When explaining why young Australians should start engaging with their super early on, most financial specialists will reference the power of compounding. In simple terms, they mean that the longer you are invested, and the more you contribute to your super earlier in your career, the more likely you are to hit your goal for retirement.
So, if you start thinking about your retirement and super in the early stages of your career, you may be able to reach your goal of retiring earlier than expected…
One of the challenges that younger Australians face is the increasing number of career changes that are occurring in their working life. According to recent research by McCrindle, young Australians are likely to change careers 5-7 times during their working life and by the age of 42, they predict that they may have already had about 10 jobs - click here. That is an average tenure within a job of just under three and half years.
With each new job is the potential for further scattering of your super across new super funds. Each employer has in place their own default super fund which they will pay your super guarantee contributions (SGC) into unless you’re engaged with your super and instruct your employer to direct your SGC payments to your chosen fund.
Based on the above statistics, this presents 10 situations where you may end up commencing membership with a new super fund, all before you reach your mid 40’s.
It’s therefore not surprising that research conducted by the Association of Superannuation Funds of Australia (ASFA) showed that 40% of people aged under 30 have no idea about the progress of their super and reported that 60% of young Australians have more than one super account, while 20% have three or more.
There are numerous issues that arise from not knowing where or how your super is invested and not being engaged with your future retirement plans.
Some of these include:
- Lost super – jobs which are only for short periods of time have super paid, sometimes after you leave and can often result in lost super.
- Multiple fees – super fund management fees can be duplicated which results in you paying more fees that you would if you managed all your super in one place.
- Duplicated Insurance – most employer super includes default insurances for you for Life and Disability. This may be duplicated across multiple funds and may also still not be sufficient for your needs.
- Investment risk – where you invest your super for retirement is important. Not knowing where or how you are invested can impact your ability to achieve your retirement goals and reducing the benefit obtain from the power of compounding.
- Tracking – if you don’t know where your super is invested, it’s virtually impossible to know if you are on track to your retirement goals.
Super can be defined as ‘a system where money is placed in a fund to provide for a person’s retirement’, but that doesn’t mean that young Australians shouldn’t be much more engaged with what is happening with 9.5% of their income each year.
By comparison, consider the level of engagement that takes place when we open a savings account to save for example for a home deposit.
- We look for an account with the best interest rate and lowest fees to ensure best possible returns.
- We then look to set up regular savings to that account to build the balance.
- Then each month or so we check to see that the money is going in there, how much we have saved and how much interest we have been paid.
When a super account is opened with a new employer, often only the bare minimum is filled out on the forms provided and you end in the company’s default fund, whether you wanted to or not.
Super is arguably one of the most important forms of investing we will experience throughout our lives, so why is the initial research, engagement and ongoing interest lacking?
How young Aussies can engage with super
With these trends now front of mind, what can young Australians do to start to engage with their super now so that they can maintain control and direction towards achieving their retirement goals:
Reclaim Your Lost Super
According to the ATO there is currently almost $18 billion in lost or unclaimed super. To ensure that you have all of yours, perform a ‘Super Search’ with the ATO to locate any lost super. It is also worthwhile checking old paperwork to see where else you may have super.
Once you have located all your super, then you will need to consider the benefits of consolidating these into one or more super funds.
Carefully consider all the benefits of each of your funds and be very mindful of the insurance implications and risks of closing accounts. You may wish to seek some assistance with this.
Once you, or your financial adviser, have assessed which fund best suits you, it’s then a matter of consolidating your funds, ensuring your insurances are in place and investing the balance appropriately.
Remember to notify your employer if you change super funds, so that your SGC payments will be made to the correct fund.
Actively Implement Super Choice with each New Employer
When you commence employment with a new company you will be provided with the opportunity to either join their default super fund or to select your own existing super fund.
This is known as Choice (full details available on the ATO site) and is used to nominate where your employer pays your SGC.
Once you have organised your super, it’s important to ensure that you then maintain that as your primary super fund for your contributions moving forward.
Review your Super Statements
Each year your super fund provider will send you at least one statement generally following the end of financial year.
When you receive these statements it's important that you take a look at some key parts and compare them to the previous few years.
Areas of interest are:
- The balance
- The investment returns
- Your contributions
- The insurance cover
- The portfolio and where you are losing or gaining returns from
Looking at each of these areas and at least comparing against the previous years will help to give you some idea of the forward progress of your retirement funding. It also helps you with the next point...
Set A Retirement Goal To Aim For
You’re never too young to know what kind of lifestyle you want when you retire. By setting even a very loose goal of how much income you want to retire on will help set a target amount to aim for in your Super fund for your chosen retirement age.
Whether you hit this goal or go way beyond, is often a result of setting it in the first place and continuing to measure your progress towards this goal regularly. The earlier you get started the longer you have to make adjustments steering your super fund towards your goal.
Consider the Benefits of Small Additional Contributions.
Time in the market significantly impacts the effects of investment compounding. This basically means that by getting more into super earlier, the more money there is to start working and earning for you in the long term.
For example, a young Australian who puts 1% extra of their earned income into super each year from age 25, let’s say an additional $37.50 per month, could end up with over $58,000 additional in super at age 60.*
Determining how much additional funds you have to contribute to super is an important strategy to consider. For many 1% (e.g. $35+ a month or $1.10 a day), would hardly be noticed if immediately contributed, and as illustrated can have a big impact on achieving your retirement goals.
With all the changes in the workforce and the economy, our lives are not likely to slow down any time soon. Which means taking charge of important aspects such as financial management and retirement planning should be key to all young Australians.
Investing some time now to establish a simple retirement plan and then taking half an hour a year to check its progress can mean the difference between a comfortable retirement or additional stress at age 55 when super suddenly becomes interesting.
*Note: Estimates assume 25 years commencing on $45,000 p.a. indexed annually salary sacrifice 1% of annual income p.a. to super, with no career breaks, invested in a balanced profile.