Understanding super

Superannuation, or ‘super’, takes years to build to a point where it can fund your ideal retirement.

Understanding the nuances of super will help you to find the best options to suit your circumstances and keep your nest egg growing.

What is super?

Super is money that is set aside during your working years by your employer, or through your own contributions, that becomes available when you’re older than 55 to fund your retirement. Currently the Australian Super Guarantee is 10.5 percent of your income and this will rise to 12 percent by 2025.

One of the options to increase your super on top of what is paid regularly by your employer is through salary sacrificing. This is an agreement with your employer that they will pay some of your wages into your super account instead of directly to you.

While you are working, the super company managing your money invests your funds into a range of different investment options so that your super grows over time.

Once you turn 60 and stop working you have unrestricted access to your super. You'll continue to grow your super while you're still working regardless of your age so if you're not ready to retire you don't have to.

When can you access it?

Although there is no fixed retirement age in Australia you can only access your super from the ‘preservation age’, which for people born before 1960 is 55 years old.

For people born after 1960 the preservation age increases gradually until it reaches 60 years old for those born after 1964.

When you have reached the preservation age and are ready to access your super you will need to apply for a ‘condition of release’ through your super company. You can choose to have your super paid in a lump sum or as regular smaller payments.

How much super will I need to retire?

The amount of super you need will depend on the kind of lifestyle you want to live in retirement and your remaining debts or other costs.

If you own your home and want a comfortable lifestyle with a decent amount of money to spend during the week on activities, dining out and the finer things in life, the general guide is to have 80 percent of the annual income you had while working.

For example, if you earned $100,000 in your last year of working full time, you will need about $80,000 a year to live with the same expenses in retirement.

This comfortable lifestyle can be broken down into:

◆ $835 per week or $43,601 per year for a single person

◆ $1,179 per week or $61,522 per year for a couple

Over 20 years, this amounts to $1,230,440 for a couple or $872,020 for a single person.

A more modest lifestyle will look like:

◆ $533 per week or $27,814 per year for a single person

◆ $797 per week or $40,054 per year for a couple

This adds up to $801,080 for 20 years worth of savings for a couple or $556,280 for a single person. These rates do not take into account the impact the COVID-19 pandemic has had on your circumstances, such as inflation driving up the cost of living.

Be realistic about the funds you will need to live healthily and happily in retirement. Consider future medical conditions you might develop that could affect your expenses and whether you might need to work longer or continue doing part-time work for a time to boost your savings.

Factors to take into account

As super funds each offer different investment options and returns, there are several factors you need to be aware of to get the most out of your super:

◆ Watch your super

Be aware of how spread out your super is across different accounts and companies as there could be a fee per account - causing you to pay more than you need to. Consider consolidating your funds.

◆ Performance

Examine the current and past performance of your fund over the past five years to see whether the returns are what you expect.

◆ Insurance coverage

Many super funds also provide insurance for clients, such as life insurance or income protection. Adding these offerings can mean cheaper fees on your super, although it will reduce your super balance as the cost of the insurance will come out of your account.

◆ Fees and charges

There is a range of fees your fund might charge - investment fees, buy and sell fees, membership fees, administration fees and advice fees. Balancing these fees with your risk and return ethics is important, because low fees might mean the returns aren’t as high.

◆ Extras and benefits

Each super company also offers benefits as incentives to join, such as complimentary financial advice, gym membership discounts or shopping discounts.

◆ Investment policies

You need to understand how your fund invests your super so that you know it aligns with your ethics and what you consider acceptable risk. For example, if you don’t want to invest in fossil fuel you will need a super fund that invests in renewable energy instead, but might want a more diverse investment portfolio to counteract investing in a relatively new industry.

◆ Risk profiles

As you age your risk profile, or what you consider an acceptable risk for your super investment, is likely to change. When you are younger you might be comfortable with a riskier investment in order to receive higher returns, but when you are close to retirement you might prefer to have steady and more reliable growth in the money you need to live on.

As always, speaking to a financial advisor about your super will be beneficial for your financial situation and retirement plan.