Having enough money for retirement is a crucial element of financial security. The easiest way to ensure your stash will last in the golden years is to start saving young and let compounding grow your wealth. There are a number of benefits and incentives which make saving through superannuation attractive. Here’s how to set up a superannuation saving plan when you’re starting out.
After tax contributions
If you’re a low income earner, then the easiest way to grow your super balance is through the government co-contribution. If you make an after tax contribution the government will also contribute up to $500 each financial year. To receive the full amount, you need to be earning less than $36, 021 and be getting at least 10% of your income from employment. Read more about it here.
If you are already earning too much to be eligible for the government co-contribution, then consider salary sacrificing. Any pre tax contributions made directly from your salary will only be taxed at 15%, which is obviously beneficial if you are on a higher marginal tax rate. In simplistic terms, if your tax rate is 25%, and put $1000 into superannuation, instead of taking it as income, you would only pay $150 in tax instead of $250. There are conditions and criteria that need to be considered though, read more about salary sacrificing here.
If you are living with your partner then make contributions to their superannuation account, you may be entitled to a tax offset of up to $540. Your partner needs to be earning no, or a low, income. Again, by making contributions and receiving a tax offset you will reduce the amount of tax payable your overall income. Read more about this here.
The downside to investing through superannuation is that it is almost impossible to get the money out until you are retired. So don’t put money into superannuation that you will need to before your at least 60. However, adding small amounts over a life time can make a big difference.
Assuming you were earning $50,000 your employee should be contributing $4,500 each year to your superannuation account. If you keep receiving the same annual contribution and made an average return of 8% for 40 years you would end up with $509,000 (disregarding fees). By contributing $1500 extra of your own money each year your balance would grow to $680,000 (disregarding tax and fees).
ASIC has a great calculator to help optimize your superannuation strategy. By making small but effective contributions to superannuation when you are young, you set yourself up for a wealthy retirement.
We also recommend talking to a qualified financial advisor about your superannuation calculator. Small changes now can make a big difference when you retire.