Time to take action to stop falling super balances
Most people who accessed their super accounts during the pandemic were single parents, women and low income earners.
Something very worrying has been happening to the super accounts of many Australians.
Young people – particularly women – have been dramatically draining their super accounts when the pandemic rules allowed for it.
Figures produced by the Association of Superannuation Funds Australia show that three million Australians accessed their super early, with a million of those left with less than $1,000 in their super account and 163,000 people left with no super at all.
Most of those taking out money early were single parents, women and those on low incomes, with 44% of applicants aged under 35.
The problem with that is every one of those who took out the full $20,000 through early release will now be an estimated $43,000 worse off in retirement – or even more if they are aged below 30.
Compound returns do the heavy lifting
What those figures demonstrate is the benefits of investing early into super, when compound returns do most of the hard work in raising super balances over time.
So, what is the best way for anyone who finds themselves in this sort of situation to catch up and get their super trajectory back on track so they can enjoy a comfortable, worry-free retirement?
Well, like many things in life the answer is to make small changes and stick with them over the long term.
In this case the main strategy is to sacrifice just a small amount of salary every pay period into super and stick with that strategy for a long time to make a really big impact.
Government co-contributions can make a massive difference
It is also useful to check out your individual circumstances to see whether some of the government co-contribution strategies might be worth pursuing – particularly for a parent who might be taking a break from work after the birth of a child.
In that case a spouse contribution of $250 a month ($3,000 a year) will attract a tax offset of $540, which is the equivalent of earning an 18% return straight away.
The main conditions attached to this is that the non-working spouse’s income needs to be below $37,000 in the year the tax offset is claimed.
In other circumstances, making a contribution of $1,000 into your own super fund from after tax earnings can attract a $500 co-contribution from the government, which is effectively a rapid 50% return on your money.
Just be careful to check all of the salary and other conditions attached to the co-contribution schemes on the Australian Taxation Office’s (ATO) website to make sure you are eligible before starting.
Salary sacrifice takes the pain out of boosting super
Perhaps the best way to gradually improve your super balance without causing too much hip pocket pain is to salary sacrifice some money into super at every pay period.
Recent research by Finder found that 86% of Australians don’t top up their super fund regularly and only one in five Australians have made one-off contributions in the past.
That is despite the ability of salary sacrifice to speed up the ability to retire early and have enough to live on.
One strategy Finder suggests is that when you earn a pay rise, that extra money should be sacrificed into super.
Even amounts like $100 or $200 a month will make a massive difference to super balances over time if you leave them in place because of the power of compounding returns.
Often due to the way salary sacrifice reduces tax bills slightly, the amount that is actually missing from your pay packet is quite a bit less than the amount going into super.
Gen X are getting the message
Interestingly, Gen X are the most likely to make monthly contributions to their super (17%), compared to 10% for Gen Z, although about a third of Gen Z plan to make a salary sacrifice in the future.
The recent release of the ATO’s Statistics Report for the 2019-2020 financial year showed a stark reminder of why women in particular should take a very strong interest in their superannuation.
With the average taxable income for men at $74,559, more than $21,000 above their female counterparts on an average of $52,798, women are at a big disadvantage in saving for retirement.
That difference is worse than it looks when you consider that women live longer than men and often take breaks in their careers to give birth and care for babies – leaving further dents in their super savings.