Superannuation Pt 1
Welcome to the third instalment of Finance Students’ Association’s Millennial Money Series, where we demystify key topics in personal finance affecting university students. Today we introduce Superannuation. While this may not be at the front of mind for every student, we try to outline why making informed choices now can set you up for the future
Superannuation, often referred to as Super for short, is a compulsory savings scheme (created by the government) that requires employers to contribute a fixed percentage of an employee’s wage – specifically 9.5% - to a savings fund that can’t be accessed until retirement. It is also a legal requirement of employers to pay Super (with some exceptions), including for international students. Read here for more detail.
Super has been around for a long-time, but it was not until 1992 when the payments were made compulsory. The idea behind this initiative was to ensure that as many people as possible had an adequate nest egg to fund their retirement at a reasonable standard of living, rather than having to rely on a government pension. This compulsory amount started at 3%, but overtime it has risen, with plans to increase the Super Guarantee to 12% by 2025.
Why Should I Care About Super?
Arguably Super has become more important over time for two main reasons. Firstly, people are living longer and therefore spending more time in retirement. There is also a growing movement of people seeking to retire early. Therefore, if people are spending more time in retirement, it makes sense to ensure that we are set up to enjoy this period of our lives. Secondly, as mentioned above, the compulsory Super amount has increased significantly over time and now represents a key asset for many individuals.
However, this begs the question: why should I care about Super right now? This is a question that a lot of people ask themselves at a young age, and therefore they often leave these decisions for later in life. The important point here is that the decisions you make now can have a significant impact later. This is because of compound interest, one of the most powerful forces in the finance.
We will illustrate this point with a simple numerical example. Suppose that you start at the age of 20 with five thousand dollars. By default, you are invested in Super Fund A, but you have the option of switching to Super Fund B. Both Super Funds offer an 8% gross return, but, after accounting for fees, the net return on Super Fund A is 7% and the Net Return on Super Fund B is 7.5%. Suppose also that you retire at age 65. Let’s see what the difference is between the two funds.
Future Value of Super Fund A: 5000*(1.07)45 = $105013
Future Value of Super Fund B: 5000*(1.075)45 = $129525
It is amazing that a seemingly small difference in return makes a difference of $24500 in the future value of the fund. Of course, choosing a Superfund is a lot more nuanced than this simple example, but hopefully we have given you an appreciation for the value of planning ahead when it comes to Super.
If you haven’t come across compound interest, read this for more information or watch this educational video.
Conclusion and More Information
Now that you have a bit of an understanding of what Super is and why its important, we will discuss in next week’s article about some of the different choices that you might come across when choosing a Superfund, as well as some tips for managing and boosting Super. In the meantime, if you want more information on the topics covered today, try the following resources:
The Finance Student's Association is not a financial adviser, the views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.