In Australia it’s referred to as Superannuation. In the US it’s known as a 401k fund. The purpose of both is to provide a retirement benefit for employees in the form of a passive income and to reduce the reliance on a government pension.
In Australia, it is mandatory for employers to contribute 9% of employee earnings into a nominated superannuation fund. Employees have a choice of funds to use, meaning they can nominate their employer fund or a fund of their own choice.
Employees can also nominate their own Self Managed Superannuation Fund which is a personal fund run by the member and approved by the Australian Taxation Office.
With the right investment strategy, every employee has the opportunity to build a substantial fund for retirement.
Take a 20 year old today and let’s assume they work for 40 years. Let’s also assume that during their working life they earn the Average Weekly Earnings which in 2009 is currently around $62,000. We’ll also assume that their 9% super is included in that figure and their wage increases at the rate of 2% each year.
If they retired at age 60 and achieved an average return of 6% p.a, they would have approximately $1,095,000. Their ‘average wage’ would also be around $132,000 p.a which means less than 10 years of their pre-retirement income. What if the return was 8% p.a? The final balance would end up at approximately $1,800,000.
That’s over $700,000 more just by achieving an extra 2% p.a.
So the question is how do you grow your super to maximise your returns?
The biggest mistake many people make is being invested into ‘balanced’ managed or mutual funds where perhaps up to 50% of their funds are invested into cash or fixed interest investments.
This is fine if you want to use some of the money in the next 3 – 5 years and don’t want to risk any fall through the uncertainty of the stock markets. But with superannuation it’s not your money until you reach retirement, meaning that if you are only 20, then you have a 40 year time frame for investment. Even at 50, you have a ten year time frame.
If you are more than 5 years away from retirement you should have 100% of your money invested into ‘growth’ assets regardless of your personal risk profile. The concept is like deciding to invest your money into NAB or CBA shares for 10 or 20 years instead of putting it into one of their term deposit accounts.
And that’s what many people are doing when they choose a ‘balanced’ investment approach either through their employer sponsored industry fund or their own fund.
Another great way to grow your super is to take advantage of the government co-contribution scheme. This can give you returns of 100% every year if you qualify. If your income is less than $61,919 the government will make a pro-rata contribution into super for each dollar you contribute up to a maximum of $1,000 p.a.
If your income is $31,920 or less, and you contribute $1,000, then you get the full co-contribution from the government of an additional $1,000. That’s a 100% return on your money before you even begin investing. Imagine the compound effect of that over a 10, 20 or 40 year period.