Having kids can cause a $340,000 hit to your super fund

Kids are expensive – and they can also indirectly affect your retirement income!

Children are priceless – but they can also be pricey. For children born in 2016, the estimated cost of their education alone is calculated as:

  • $66,800 for a government school education
  • $230,000 for a systemic school education
  • $468,000 for a private school education

That’s just the cost of education; there are plenty of other child-related expenses (food, clothes, nappies, housing, childcare, entertainment, lost income for the primary carer…) that are almost unavoidable. And in addition to these direct expenses there is also at least one other cost that we don’t always think about: the superannuation that you might otherwise have received.

 

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A new Colonial First State report (the Power of Closing the Gap) has reiterated a well-known fact that there a significant gender gap in superannuation balances. Across all age groups, according to Colonial First State, the median super balance of females is A$30,000 compared to A$46,000 for males, a super gap of A$16,000 or 35%. And the older a couple is, the greater that gap.

So what does that mean for superannuation?

For workers eligible for super, the current minimum contribution rate that an employer pays is 9.50% of your ordinary time earnings. It might not sound like much, but effectively missing out on that 9.5% of salary, as well as missing out on the earnings that that money would have attracted over the next thirty years between having children and retirement actually does add up to a lot of money.

How much? CANSTAR has calculated that 5 years out of the workforce from age 30 to 35 could equate to a $341,000 hit to a primary carer’s superannuation account balance, in today’s dollars, by the time they retire. That’s based on starting work at age 21 on a salary of $45,000, with a 2% increase in annual income. Oh, and a super fund earning 7% after tax and receiving the 9.5% employer contribution, increasing to 12% contribution by 2025. Obviously the more that you (or your super fund) earns, the greater the potential hit.
The impact a career break can have

This is generally where readers protest that they don’t even have that much in super, let alone would be able to lose that much in super. But that’s called the power of compounding returns: the fact that earnings on earnings on earnings, over 30 years, adds up to a lot of money.

The same principle holds true in reverse, which is why a $300,000 home loan over 30 years at minimum repayments may cost you around $580,000, even at a low interest rate of 5 percent.  For example:

 

Loan Amount $300,000.00
Interest Rate 5.00%
Years 30
Monthly Repayment $1,610.46
Total Cost $579,767.35
Canstar.com.au. Assumes a 30 year loan term, making minimum repayments. Calculation is illustrative only.

 

How can you boost your superannuation?

There is no easy answer to the dilemma of how to take unpaid leave without sacrificing future retirement benefit, but a few potential options would be:

A: Lobby the government to pay superannuation contributions for several years of parental leave (this was a suggested policy change during last year’s Senate Inquiry into the Economic Security for Women in Retirement).

B: Make extra contributions into your superannuation fund yourself while you’re on unpaid leave.

C: Check the fees and investment return on your superannuation fund to make sure you’re getting great value; view CANSTAR’s recent Superannuation ratings report here.

Or perhaps just take a deep breath and accept that raising kids is expensive.  Priceless, in fact.

 

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Sponsored products displayed are paid advertisements and Canstar receives a fee for referring you to the advertiser.  Past performance is not necessarily a guide to future performance; unit prices may fall as well as rise. Performance information shown is for the historical periods up to 30/06/2016 and investment options noted in the product information. Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the maximum applicable ongoing management fees and membership fees. Performance information is provided by Rainmaker Information Pty Ltd ABN 86 095 610 996 AFSL 461816 (www.rainmaker.com.au) which provides general information on superannuation. Any advice on this page is general and has not taken into account your objectives, financial situation or needs and is not a recommendation for your particular circumstances. Consider whether this advice is right for you. Consider the product disclosure statement before making a purchase decision. You may need financial advice from a qualified adviser.

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