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Avoiding the heavy lifting of superannuation contributions - starting early really does pay-off

“Most people leave it until they’re fifty and then start to stress” was how a professional colleague recently described the attitude of most Australians to putting money into superannuation for their retirement. It was an on-the-run comment yet it really did sum up what happens in the financial lives of very many people when it gets down to allocating their income throughout their working life.

If you’re 20 years of age, the traditional retirement at age 65 is so far down the track as to warrant scant attention from you. Friday nights out and that trip to Europe are far more pressing priorities! If you’re 30 or there about, you and your spouse will be thinking more about getting your first home or dealing with the mountainous mortgage that helped you buy it. In your forties, you’re counting the years until the kids finish school and starting to worry about how much it will cost to send them to uni.

In your 50s you’re tiring of work ”“ tiring of not enough spare cash despite pay rises over the years and starting to realise you’re running out of time to really build your superannuation nest egg into a realistic, valid, number. The fact is that many people in their fifties just wish they had started a whole lot earlier on their superannuation savings.

Whenever I think about superannuation adequacy ”“ having enough to go the distance in retirement ”“ I recall a man I met in the early 1990s in the early period of my professional practice. He was 58 years old and was absolutely worn out from working. Within a few minutes of meeting him and his wife, I knew he just didn’t have the energy to keep pushing on until he turned 65 ”“ the prospect of seven more years of work left him cold with dread. Tired and worn out he might have been but he was not totally and permanently disabled; a diagnosis for which might have seen him become eligible for disability benefits from the government.

The couple had made the appointment with me to see if he could retire with the $114,000 he had accumulated in his work superannuation fund. For them, $114,000 seemed like such a lot of money and while even today it is a large sum of money, it’s not enough to fund a retirement which for him would have been, based on average life expectancy, would have been around 20 years or so. It was an unenviable task to have to advise the couple they simply didn’t have enough money. Even if they had modest very living costs, $114,000 might have only lasted a few years until completely exhausting the capital.

Back then, and still today, age pension eligibility for men could be assessed from age 65 so he faced the prospect of another 7 years of work before being able to retire. The disappointment showed when his eyes glistened up as I explained the mathematics of their situation.

There is a simple lesson for everyone in that couple’s circumstances ”“ start superannuation saving early; preferably from when you first start work. It’s the so-called ‘magic’ of compound interest which is your great ally when it comes to long term saving and investing.

Please Note:Legislation has recently been passed to lift the compulsory employer superannuation contribution from 9% of salary to 12% of salary by 2020.

This is a simple straight-line calculation and of course the lives of most people are rarely so predictable. Larger (than the assumed 3% p.a) salary increases over a career through promotions and the like would also change these numbers. And yes, if you’re a professional, average starting salaries can be higher than the $30,000 p.a. assumed here. Nevertheless, mathematically, the projection illustrates the benefit of starting early with superannuation or any form of long term saving.

In order to achieve a super fund balance of around $950,000 in the ‘starting at age 50’ scenario above, it would be necessary to contribute around 45% of salary to super for each of the last 15 years of working. That’s very ‘heavy lifting’ in anyone’s numbers but for the 20 year old starting off with a 6% of salary sacrificed to superannuation from the start, there is no heavy lifting as such because the ‘load’ is eased by being spread over a longer time frame.

In looking at what the real impact on lifestyle the scenarios above might have, if we assume that for each $100,000 of capital a well balanced retirement portfolio generates say 5% p.a. income, the ‘starting at 20’ scenario would lead to around $17,200 per year in extra income ”“ say $330 per week. There’s quite a bit of lifestyle in that for most people.

These numbers illustrate that by simply ‘paying yourself first’ ”“ in this case the 6% of salary from age 20 ”“ you substantially ease your savings burden later in your working life and achieve a very large increase in final benefit.

One final point about the numbers. By age 60 the 20 year old saver would have accrued around $696,000 ”“ almost $90,000 more than the person who waited until age 50 to start saving to super would have even with another 5 years of work to 65! I know that the 58 year old man in my office all those years ago, the man who stoically held back tears of disappointment in the numbers I gave him, would have been immensely relieved if I had been able to tell him he only need to drag himself off to work for another 2 years to age 60. I suspect that the choice of whether or not to work until age 65 would have been immeasurably satisfying for him.