Making Your Money Work

Your superannuation can be a safe, low-cost and tax-effective way of saving for retirement if you make the most of it.

Super's for retirement, not before

To get your superannuation, anyone born after June 1964 must be over age 60 (reducing to age 55 if born before July 1960). You can continue working part-time, using part of your super for extra income. Only in cases of severe financial hardship or compassionate grounds can you get any money earlier. Otherwise, early access to your super is illegal.

Will your employer's contributions be enough?

Possibly only if you join a fund in your early twenties, take no more than a year or two out of the workforce and work until you retire at 65.

In reality, many people may have longer breaks from the workforce, and so employer contributions by themselves may not give you a comfortable retirement.

Should you contribute more?

Contributing a bit more to your superannuation will make a real difference to your retirement savings. If you contribute extra from your after-tax income, you don't have to pay contributions tax on those extra contributions, and they get more favourable tax treatment when you retire. Also, you may receive a co-contribution from the government.

For example (see table below), Nat has $20,000 in super at age 35 and a gross salary of around $29,750, so is eligible for the co-contribution. Nat's thinking about contributing an extra $1,000 after-tax, and here's the difference this could make.

Nat's superannuation account balance in today's dollars*

	After 10 years	After 20 years	After 30 years, at age 65
Employer's 9% contributions only	$55,000	$107,000	$182,000
Employer's 9% plus an extra $1,000 after-tax contributions, with $1,500 co-contribution	$82,000	$169,000	$291,000

*Using the 'FIDO superannuation calculator' on ASIC's consumer website, and assumed Nat was in a typical 'industry fund'. See Your guide to the FIDO super calculator for our assumptions and reasons.

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For higher income earners, if your employer allows you to contribute extra from your pre-tax income, you can also benefit. (If you are eligible to receive a government co-contribution, you may be better off making after-tax contributions. This applies if you earn less than $58,980 each year.)

In our example below, Sam's colleague Alex, aged 40, earns a gross salary of $70,000 and has $50,000 in super now. Alex's thinking about contributing an extra 5% in pre-tax salary, and here's the difference this could make.

Alex's superannuation account balance in today's dollars*

	After 10 years	After 20 years	After 30 years, at age 65
Employer's 9% contributions only	$137,000	$263,000	$346,000
Employer's 9% plus an extra 5% pre-tax salary contributions	$173,000	$351,000	$469,000

*Using 'FIDO superannuation calculator', and assuming Alex's in a typical 'industry fund'. See Your guide to the FIDO super calculator for our assumptions and reasons.

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Extra money you contribute must stay in your superannuation until you retire, so only contribute extra money that you can set aside until then. Otherwise, consider investing some money outside superannuation.

Why do fees matter?

Every dollar paid in fees, especially in 'ongoing' fees, reduces the final payment you get. If you can, choose the lowest cost fund that meets your needs. In a fund with higher fees, you need a higher return just to come out even.

Sam's choice of funds
Sam's superannuation account balance in today's dollars*

	After 10 years	After 20 years	After 30 years, at age 65
Sam's current fund (0.55% of balance plus $52 fee each year adjusted for inflation)	$99,000	$192,000	$327,000
Sam's alternative fund (2% of balance, no $52 charged)	$90,000	$162,000	$254,000
Effect of fees	$9,000	$30,000	$73,000

*Using 'FIDO super calculator'. See Your guide to the FIDO super calculator for out assumptions and reasons.

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Suppose Sam's about to change jobs and deciding whether to stay in the current fund or switch to another one. In our example above, Sam's current fund charges around 0.55% each year in ongoing fees plus another $52 each year. Another fund charges 2% each year and offers about 80 different investment options and Sam can switch between options daily.

Sam's got $35,000 in super now. Let's assume both funds earn the same return before fees and taxes, so you can just compare the effect of the different fees. Especially over a long time, just 1.3% extra in fees can make a big difference. So Sam has to consider carefully if the extra features are worth the cost. Most industry and corporate superannuation funds will cost you less than retail funds, although retail funds may offer services, choices or other features you may want. Higher fees do not guarantee higher returns.

Which investment strategy?

You may be able to choose how your superannuation is invested.

Before you make a choice, read about the risks and returns for each investment strategy you are offered.

Consider your personal circumstances. If you are close to retiring age, and plan to draw on your superannuation money as soon as you retire, you might choose a low-risk, low-return fund. If you have much of your working life ahead of you, or you might retire without drawing on all your superannuation, you may accept a greater risk to increase the chances of growth.

Historically it has proved extremely difficult to beat rises in the cost of living without investing in assets like shares and property. That means accepting the risk of losses in bad years. Professional advisers would expect most people, even those who have retired, to invest in some riskier assets, as well as in cash and fixed interest.

Rate of return for 20 years, reinvesting all returns	Start with	Finish up with
4% per year	$10,000	$22,000
6% per year	$10,000	$32,000

Even small differences in returns over a long time add up to a lot of money, see our example in the table above. In this case, compounding an extra 2% over 20 years earned another $10,000.

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