Wealth

Superannuation 101: super basics explained

Your superannuation holds the key to your wellbeing in retirement, so it’s worth making sure you understand it.

The money you stash away in your super fund over the course of your working life is designed to fund your retirement, so the more you save now, the more comfortable your retirement years will be.

All working Australians have their own superannuation fund, but you’d be surprised how many people don’t make the most of it. There is, however, increasing evidence that, as a nation, we’re beginning to take our super balance more seriously.

Australians had more than $3 trillion stashed away in superannuation at the end of 2019, and on average, our super balances grew by an impressive 13 percent between 2018 and 2019.

What is superannuation?

The Australian superannuation system, known as the Superannuation Guarantee, was introduced in 1991 to help us all save for retirement.

If you’re employed, your company is required to put a minimum of 9.5 percent of your annual pre-tax income into your super fund on your behalf. This amount will rise to 12 percent by 1 July 2025.

How do super funds work?

The money stashed in your super fund is invested by the fund’s trustee, and it’s their job to grow your balance while you’re still working.

Most funds invest in a mix of asset classes, including cash, property, bonds, shares and fixed interest investments. In many cases, funds will offer members the option to select from a variety of investment options, so it’s a good idea to look beyond the default investment to find the option that suits your situation.

How do I choose a super fund?

Since 2005, Australians have been able to choose their own superannuation fund. Given there are more than 200 super funds in Australia, this isn’t an easy decision to make. 

If you’re deciding on a fund, consider things such as fees, past performance, investment options, insurance and service. For more information, check out How Do I Choose the Right Super Fund?

Some people contemplate setting up a Self-Managed Super Fund (SMSF), which is a private super fund that, as the name implies, you manage yourself. However, unless you have strong investment experience, it may not be a wise decision. If you are thinking about going down this path, make sure you get professional advice first.

If you do decide to move to a new fund, it’s important to roll over your super so your existing savings continue to grow within one fund. Consolidating your super in this way makes your savings easier to manage and saves on fees. You can transfer your balance in a few simple steps.

When can I access my super?

You can access your super as early as 57 years old, but this depends on your preservation age — most people will need to wait until 60. You can withdraw your super as a regular income or take all or part of your benefit as a lump sum.

There are some limited circumstances that may allow you to access your super earlier (including severe financial hardship) but be aware that this may have a long-term impact on the size of your nest egg.

How much super will I need to retire?

How much super will I need to retire?” is the big question for prospective retirees. If you own your own home, you’ll need about two-thirds of the income you had before you left your job to maintain the same standard of living when you retire. However, bear in mind that this estimate is only suitable for above-average income earners.

Figures from the Association of Super Funds of Australia (ASFA) suggest singles need $44,183 per year to retire on, and couples will need $62,435 per year to support a comfortable lifestyle for retirees aged around 65 (March quarter 2020).

This equates to a lump sum in your super of about $545,000 for a single person and $640,000 per couple, while also assuming that you will receive a partial age pension.

Yvonne Chu, Head of Technical Services at Australian Unity, warns that while this sounds like a big sum, given that most people average at least two decades in retirement, it’s really not.

“Bear in mind that there will always be the risk of unforeseen rising costs, which can impact superannuation savings in years to come. For example, the cost of food has risen on the back of the drought,” Yvonne says. “Tucking away a little extra every month can help you grow your nest egg so you can have a better retirement lifestyle.”

How can I grow my super?

While it’s your fund’s job to grow your super balance, you can also take small steps to increase the size of your nest egg.

At some stage over the course of their working life, most people will top up their super by adding additional amounts to their fund through salary sacrifice or post-tax contributions. 

Where possible, consider taking advantage of government contributions in order to grow your balance. A key incentive to be aware of is the super co-contribution, where the government to contributes up to $500 to the super funds of eligible low- or middle-income earners who have made an after-tax super contribution.

Talk to your family and friends too. Share your retirement planning experiences, both good and bad, and look for ways to encourage your loved ones to be financially literate as early as they can. After all, making good financial decisions is good for everyone.

Australia’s superannuation system is designed to give you a comfortable retirement in your golden years, so it’s worth taking the time to think about your super now to make sure you’re on track later. 

Important information

Any case studies, testimonials statements, names, performances, examples or any other information provided are for illustrative purposes only. We cannot guarantee that you will achieve the same or similar results or outcomes. The information provided is general information only and does not take into account your individual objectives, financial situation or needs. Before deciding to acquire any product or service mentioned, you should make reasonable enquiries, read the applicable disclosure documents (such as financial services guides, terms of use and conditions, fees and charges and the relevant Product Disclosure Statements), which are available via the links provided or from our website and seek professional financial, legal and tax advice. You may also request a copy of any of the applicable disclosure documents. For more information, please contact us.