Money

Your Super gets a boost

THERE'S been plenty of good news on the superannuation front recently, and for my money it reaffirms the value of super as an important investment for retirement.

In late March the federal government passed legislation boosting the Superannuation Guarantee from its current level of 9% to 12% by 2020.  The increase will be phased in gradually to give employers an opportunity to adjust to the higher contributions.

It's a great result for employees, and according to the Financial Services Council (FSC) over time the higher contributions will put an extra $108,000 in the retirement nest egg of the average 30-year old. Older workers stand to benefit too. Those aged 45 to 54 will have an average of $39,000 added to their long term super savings.

The increase in super contributions follows welcome news on fund returns. Ratings firm SuperRatings say that after a soft end to 2011, the median balanced super fund - the option chosen by about 80% of workers, recorded gains of 2.3% in January. It means that for every $100,000 you hold in a balanced fund, your nest egg grew by about $2,300 in one month alone. And remember, this gain is reinvested to harness the benefit of compounding returns over time.

In fact, time is a key strength of super as an investment. We can't normally access our super until we retire. So unlike directly held investments we can't bail out when the market takes a dip. This is important because it means our super is left to steadily rise in value as markets recover.

To illustrate this, SuperRatings have crunched the numbers, and found that if you had $100,000 invested in a balanced fund in 2002, it would have risen in value to a peak of $169,214 in October 2007.  By February 2009, falls on global sharemarkets would have seen the same fund drop in value to $126,865. However at the start of this year the fund would have worth $159,655 - not too far off its earlier peak.

I cannot say with any certainty what investment markets have in store for the rest of the year - or the next five years. But a combination of steady gains and additional contributions over time will play an important role in improving the retirement lifestyle of Australian workers.

Nonetheless the FSC estimates that even after super contributions reach the new higher level of 12%, we will still face a collective retirement funding gap of $836 billion. That's the shortfall between the amount of super we need to fund a decent retirement and the super savings we manage to accumulate over a lifetime in the workforce.

Rather than hope it will all work itself out by the time you retire, it's worth looking at ways to add to your super.

Speak to the boss about salary sacrifice - having part of your pre-tax pay redirected into your super fund. Or make a contribution from your own pocket. Low to middle income earners may be eligible for top up payment from the government. Or, to find out if you're on track for a quality retirement, try a free 15-minute retirement review - check out www.paulsmoney.com.au for more details.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.

Topics:  employment paul clitheroe retirement savings superannuation


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