The end of the school and University year means many young men and women are starting their first ‘real job.’ That first job might be an apprenticeship, a graduate job, or something akin to a gap year. What these early-career jobs all have in common is that they entitle the worker to superannuation payments.
If you are over 18 and working, or if you are under 18 and working more than 30 hours a week, your employer should be paying super on your behalf. The minimum rate is 10.5% of your ordinary time earnings. The money has to be paid into a complying super fund. In most cases, that will be a managed fund where your super is pooled with other people’s super and used to invest in things like shares and commercial property.
The idea is that your employer puts money into super now. When you eventually retire, the money put in, plus any investment returns that have been generated, is yours to use for your retirement.
Retirement seems a long way away when you are in your 20s. But that ‘long-way-offness’ is actually why super makes particularly good sense for young people. For example, a person earning $50,000 a year should receive $5,500 in super contributions. If a 20-year old’s super fund invests that money to earn an average of 8% per year, by the time the young person turns 60, they will have $110,000 in their super fund. By comparison, a 40-year-old making the same contribution and earning the same return will only have $23,736 by the time they turn 60. Extra time means much more extra money.
Sure, inflation will mean that $110,000 in 2062 will not buy as much as it will buy today. But as long as the rate of return is more than the rate of inflation – on average over the years – then you will do well. And the more years you have money in your super fund, the better the overall result.
So, being right at the start of your working life is actually great news in terms of saving enough for your retirement. The best time to plan for getting old is when you are young.
How to Choose the Right Fund for You
In most cases, you can choose which fund you want your employer to pay your super into. This should be good news, but with so many funds to choose from, it can give you a headache you do not want! That is why it can be a great idea to talk to an adviser to help you select the fund that is most likely to help you achieve your financial goals.
The fund you choose can depend on various things. Sometimes these factors are purely financial, such as choosing a fund that minimizes fees. Lower fees mean a better return over time. Or sometimes the factors are more qualitative, such as the types of investments a fund will make with your money.
How to Invest
Managed super funds usually let the member choose how they want to invest their money. They can choose between ‘conservative’ options, where the money is mostly invested in low-risk options such as Commonwealth bonds, or ‘higher-growth’ options where the money is mostly invested in investments such as shares or commercial properties. While these higher-growth options can mean more risk of losing money, over time and with diversification, that risk can be managed and these options are expected to earn higher returns.
Once again, the length of time is important. Because younger people have more time for their super fund to manage the money, they gain a big advantage over older people.
You can also use your super fund to access relatively cheap life insurances, with the added benefit that your day-to-day cash flow is not reduced by the need to pay premiums. It used to be that pretty much everyone who signed up with a super fund obtained life insurance by ‘default.’ These days, that does not automatically happen, especially if you are under 25, have a low balance or have a period of time where you do not make contributions. In cases like that, and in some others, you generally need to tell the super fund that you want to use your super to buy insurance.
If you would like to use your super to access life insurance, talk to us about the best way to do so.
Consolidating your Super
Often, if people have worked in more than one job, they may be a member of more than one fund. That can be a good thing and some people choose to spread their super around. But it may also mean that you are paying more fees than you need to. As long as your money stays within the super system, it is usually possible to move money between super funds. Combining money into one fund is called ‘consolidating’ your super and it can save a lot of money over time.
Many young people do move between jobs. Hopefully, your new employer is happy to keep paying super into a fund you have already chosen. (As we say above, usually you can direct your employer to use a particular fund.) But, if not, then it can pay to talk to us about how to manage more than one fund.
Superannuation is a great thing and it has particular potential for young people. It is also one of those elements of your financial profile that, once set up correctly, can just be allowed to ‘gambol along’ over the years.
The key is setting things up properly in the first place. So, if you or someone you know is just starting out in the world of work, drop us a line. We can help you set things up for your long-term best interests. And it will be our particular pleasure to do so.