Super is a long-term project. Really long term. It’s based on the idea that the longer your money is in your super account, the longer it has to multiply. It can actually be more beneficial to put a smaller amount in over a shorter time when you’re younger, than to put a larger amount in over a longer period when you’re older.
What difference can it make?
Let’s have a look at twin brothers, Eddie and Albert. They’re both 21 and have just started in new roles with SA electricity providers on $80,000 a year.
Eddie is happy to let his super take care of itself. Albert, on the other hand, wants a more luxurious retirement and thinks he can put aside about 5% of his salary to super. For him, it’s about $150 a fortnight.
He fills in the online Vary Your Contribution form to ask his employer to make the 5% contribution to his super by salary sacrifice, or pre-tax contributions. Then he sits back and gets on with life.
By the time Albert is 31, he has a lot of other financial commitments, so he asks his payroll to stop making the additional salary sacrifice contributions to his super. It means that from age 31, he and Eddie are both only receiving the compulsory contributions from their employer, just the same.
What happens by the time they retire?
Both brothers retire at 60 on $60,000 a year. Eddie’s super should last him until he’s about age 90, which he’s pretty happy with. Albert, however, because the extra 5% he contributed from age 21 to 31, has over $300,000 more in his super than Eddie and it should last beyond the age of 105. It will outlast Albert!
The extra money means that Albert could choose to take a larger annual income in retirement, or he might choose to take lump sums out of his super, for first class round-the-world trips, to help his family, to buy luxury cars, or whatever he wants.
Even if Albert takes lump sums of $100,000 out of his super money when he’s 65, 70 and again at 75, his super will still last past his 95th birthday.
Imagine what a difference he would have made if he’d kept making the 5% contributions for his whole working life!
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Assumptions: 7.8% return on super during working life, 6.8% return on investment in retirement, 0% admin fees during working life, 0.4% admin fees in retirement, Insurance premium $520/year during working life, $80,000 opening salary, $5,000 opening super balance, retirement at age 60 on $60,000 a year, current age 21. CPI 2.5% Improvement 0%