How Does Superannuation Work In Australia?

Ever wondered how superannuation works? Well, when it comes to your retirement nest egg, the earlier you save the better off you could potentially be, as your investment (and it’s returns) are compounded over your working life.

Case Study: Meet Jane!

179695312Jane is aged 25 and has $10,000 in superannuation. She is earning a salary of $55,000 and decides she can afford to tip an extra $200 per month into her superannuation fund as an after-tax contribution. She decides to do that for five years (until age 30). What potential impact would that have on her retirement nest egg?

Doesn’t Make Contribution Makes Contribution
After-Tax Super Contribution Per Month (Over 5 yrs) $0 $200
Total Value of Super Fund (At Retirement) $1,930,086 $2,098,793
Source: Canstar

So, paying an extra $12,000 (5 years of $200 per month) into her super fund from age 25 to 30 has added an extra $168,700 to her retirement savings. Great!

What if she was 35 at the time she started making extra contributions?

By age 35 Jane?s salary is now $73,915 (her original salary plus 3% per annum indexation) and she has a superannuation balance of almost $122,000.

Earlier Contribution Mid-Life Contribution
Age 25 35
Salary $55,000 $73,915
Total Value of Super (At Current Age) $10,000 $122,000
Total Value of Super Fund (At Retirement) $2,098,793 $2,098,793
After-Tax Super Contribution Per Month (Over 5 yrs) $200 $437
Total After-Tax Super Contribution $12,000 $26,220
Source: Canstar

To reach the same end goal of almost $2,099,000 by retirement, Jane would now need to contribute an extra $437 of super contributions per month into her superannuation fund for five years.

Now Jane is aged 50

Life gets in the way, and Jane has reached 50 without finding the time or money to add extra to her super. She has continued working throughout her life and now her salary is a healthy $115,157. Her superannuation is also a healthy $568,000 – but there?s more to add.

Earlier Contribution Mid-Life Contribution Later Contribution
Age 25 35 50
Salary $55,000 $73,915 $115,157
Total Value of Super (At Current Age) $10,000 $122,000 $568,000
Total Value of Super Fund (At Retirement) $2,098,793 $2,098,793 $2,098,793
After-Tax Super Contribution Per Month (Over 5 yrs) $200 $437 $1,316
Total After-Tax Super Contribution $12,000 $26,220 $78,960
Source: Canstar

At age 50, for Jane to reach the same end superannuation balance as her 25-year-old self could have achieved with a monthly contribution of $200 for five years, she will need extra super contributions of $1,316 per month for five years – or a total of $79,000.

Chances are that will equate to an extra year in the workforce, just to afford the extra payments.

It?s a challenging thing to prioritise, with obtaining career qualifications, saving for a house and affording a family all likely to take precedence, not to mention ongoing superannuation changes. Nevertheless, if you can find some spare dollars each month from your disposable spending, even just for a few years, your retirement nest egg could be that much bigger.


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