Episode Details

After 1 July this year, your employer must increase your super contributions from 9.5% to 10% of your salary. This contribution rate will then increase by 0.5% p.a. for the subsequent 4 years until it reaches 12%. This could boost your retirement savings but only if you optimise two things.

The government was tempted to delay this increase

It has been reported that the government was contemplating delaying increasing the Superannuation Guarantee Charge (SGC). The increase in SGC was proposed by the Gillard government back in 2012 but it was subsequently delayed until 1 July 2021. The Morrison government was probably concerned about whether businesses could afford higher employment costs during a pandemic. In addition, some commentators have suggested it would deter higher wage growth because any possibility for wage increases would be thwarted by higher superannuation costs.

In my opinion, not delaying the super increase is the right decision. The underlying economy is recovering better than expected. And an increase in wage inflation in the short term is probably unlikely anyway for a variety of reasons. Forcing people to increase the amount they save for their future retirement is a good thing for them personally and the country as a whole.

What effect will this have on your future super balance?

The table below sets out the projected increase in super balance depending on your income and your super balance today. There are three numbers in each corresponding cell. The first number represents the percentage increase over a 10 year period, the second over 20 years and the third over 30 years. For example, if your super balance is $200k and your income is $150k, then this increased SGC rate over the next 5 years is projected to increase your super balance by 6.1% in 10 years, 9.1% in 20 years and 10.3% in 30 years.

See table at https://www.prosolution.com.au/super-increase/

As we can see, the increase in SGC really helps people with lower super balances the most.

However, if you already have a healthy super balance, the increase in contributions probably isn’t going to have a material impact on your retirement. Instead, fees and returns will have a greater impact on your future balance.

It is important to highlight that most people will need to invest in assets in addition to super to be able to enjoy a very comfortable retirement. That is, super alone is rarely sufficient.

There are two factors you must optimise:

Factor one: Minimise fees

Fees are guaranteed. Investment returns are not.

It is important to minimise investment and administration fees as much as possible. Unlike many things in life, paying higher fees does not generate higher returns. In fact, many studies have shown that there is an inverse relationship between investment fees and investment returns. That is, typically, the lower the fees, the higher the returns. With investments, when you pay more, you receive less.

If your super is with an industry super fund, you should aim to pay no more than 0.70% p.a. in investment and admin fees plus a fixed dollar fee of around $100-140 p.a. If your fees are materially more than this, you should review alternative options.

Factor two: Maximise returns

This is an obvious second factor. Of course, you must maximise your investment returns.

One of the commonly espoused benefits of industry super funds