Australia has a slow burn retirement system that’s pretty super, so when it comes to how we maximise superannuation, here are the habitual things we’ve done to help us achieve both a big balance in the amount, and good balance in the distribution.
In 1992, superannuation was introduced as a way to ease pressure on the government to provide a state pension to an ever-increasing ageing population. While the minimum amount employers have to contribute is growing, looking after super really is something that can’t be left up to them alone.
Younger people have the highest levels of dissatisfaction out of any age group with their superfund, and many have no awareness of the retirement planning tools their fund offers them.
Other than the fact that they know their employer pays into their fund mandatorily, it’s clear that there’s a general lack of awareness around how their money is invested, in what risk allocation, how much they could retire with if they added more, or even what options are available to them should they take time out of the workforce to raise babies, or enjoy sabbatical.
For self-employed people, it’s no different. As a business owner myself, I have to make the effort to manage my own super affairs since most of my client arrangements don’t include a super guarantee.
It’s not compulsory for me to make any contributions, either, which is why it’s no surprise that a quarter of self-employed folk have no super at all (or retire with less than half of that of a standard wage earner).
Side note: I always factor in an additional 10% to my service fee to cover super, and just contribute it myself. If I’m eligible for the super guarantee – even as a contractor – I advocate for it and point to the relevant legislation changes to support my request. If you are eligible, you should receive it.
In today’s terms, it’s anticipated that the average Australian individual will need $545,000 in retirement, and a couple $640,000 (supplemented with an aged pension). That assumes a couple of things: firstly, that by the time they retire, most people will realistically have that amount from standard employer contributions alone (or voluntary contributions if self-employed). Even with ambitious calculations, it’s a stretch.
It also assumes that the person has a sizeable enough income that the super guarantee (currently 10%) is a significant enough figure in and of itself to be invested for them, and must be paid consistently from an early age.
The moment they take time out of the workforce, though, the numbers start to scatter.
A couple of years off to raise a baby once, twice or more?
An extended redundancy during a global pandemic or industry depression?
Some time off after a stressful job experience to plan for what’s next? Taking time to study, or return to university to retrain? It’s murky waters.
It also assumes that the aged pension (which currently works to supplement lower super balances) will still be a viable option in twenty to thirty years, which is not a guarantee.
So, taking control of your superannuation by understanding what options are available to you outside of your normal contributions can mean a significant increase in the capital you have to draw from in retirement.
Even though we plan on leaving the traditional workforce three decades earlier than most, we would still like to have a healthy sum of superannuation by the time we’re able to draw it.
To help us do that, there’s a few simple things we’ve made a staple part of our financial routine to help us bolster our capital as quickly as possible.
Salary sacrifice to maximise superannuation.
With many employment contracts (even non-permanent arrangements), the super guarantee equals 10.5% of your ordinary time earnings, paid in addition straight to your superfund.
Making extra contributions in addition to this 10.5% seems like a logical solution to grow the amount, but when it’s taxed as pay-as-you-go (PAYG) withholding tax at your marginal tax rate, it can be a heavy hit.
Salary sacrificing is a smart way to get around this. You need to do a little bit of paperwork with your employer’s HR team to sort it out, and in the short-term it will reduce your take-home pay, but it will mean that amount is taxed at the super tax rate of 15%, versus your marginal tax rate.
I think there’s a psychological benefit to salary sacrificing super too, and why for us it works so well. We can put our money to work for us without feeling the loss of it in the first place – particularly helpful when the FIRE journey starts and you’re having to actively see your money hit your account before putting it away somewhere else.
Plus, it’s just easy as a set and forget system, and any extra time that you spend in the market doesn’t hurt.
Make voluntary super contributions.
Being self-employed, I don’t always get employer contributions under the super guarantee, except in the case of extended contracts where I work over a certain amount of hours, and – for all intents and purposes – behave much like a normal employee.
That means that I have to make a concerted effort to keep growing the balance, given that contributing to my super account isn’t mandatory.
So, I make these deductions as voluntary contributions and make sure, when I lodge my tax return, I claim a deduction to ensure I’m taxed appropriately on the non-concessional contributions I’ve made up to the limit. You can still make voluntary contributions in normal employment up to the cap, too. It isn’t only a super booster for us self-employed folk.
Double benefit from contributions splitting.
When I was on maternity leave, my income dropped significantly – as did the contribution amount I was able to make to my superfund. If you’re the lower income earner, or your spouse is, contributions splitting can be a smart way to go.
It’s an amount booster in the lower earner’s fund, and a tax offset benefit for the partner who makes the financial contribution.
There are a few eligibility criteria to hit, like being able to prove Australian residency and that you’re both married or de facto. As well as this, the lower partner’s income must remain below $37,000 (for the full tax offset), and below $40,000 (for the partial one).
Because I was receiving the parental payment and doing some freelance work here and there, mine sat just below $40,000 for each year of maternity leave before our son turned two. This meant that my husband could claim a partial offset, which of course helps – but more importantly, my superfund continued to grow in the right direction rather than being eaten into by fees.
Side note: I feel especially passionate about this having had a child. The work I did on maternity leave was, by all accounts, harder than the income-deriving work I was doing before. Yes, I say work because raising kids is work. Even so, I was the one being penalised by a system that didn’t truly see the value in me taking time to do this. Contributions splitting was a way to ensure I could access family income as it was created for personal long-term benefit. I love my husband as I’m sure many women love theirs, but we can’t be foolish around retirement planning. The statistics on women and retirement figures are real.
Enrol in the highest-risk portfolio option.
If you’re young and have time on your side, it may be worth ensuring you’re in a high-risk asset allocation option with your fund. Both myself and my husband are enrolled in the highest risk options, and we will adjust this accordingly as we get older.
High-risk options are typically where fund members will see the most growth, because you can afford to withstand more volatility that happens along the way. Funds have investment managers who are usually quite happy to talk to fund members about what sort of investment portfolio would be best for them to be in for the stage of life they’re at, and plans for the future, so take advantage of that service if you can.
Remember, this isn’t financial advice (and I’m not a financial advisor!). I don’t know you and your circumstances, age, industry, superfund, or really anything about you. High-risk asset allocations (also usually called ‘growth’ funds) would not suit a number of people — it’s not a blanket solution for everyone. It’s best to speak to your fund manager, or a licensed financial advisor if you have a complicated, unique situation.
Cover your fees.
If you can’t add the recommended amount into your superannuation fund because you’re not earning employer contributions, I think it’s worthwhile at the very least to make contributions enough to cover any fees or insurance premiums associated with the account, like for total permanent disability or death.
Perhaps you don’t have a partner who can make spousal contributions on your behalf, and you’ve been out of work for a while, the fees can still take a hit. To ensure that these fees don’t eat away at the balance, it may be worth chucking in enough to cover them, especially when they still count as non-concessional contributions taxed as the super tax rate.
Supplement a little here and there.
As was always our plan, we want to retire early. Before we reach it fully, we’ll be slowing down on work by booting a day here or there as the passive income derived from our other investments supplements the income we receive from traditional 9-5 work.
As superannuation is still a key part of our retirement plan though, continuing to contribute to it (even as we ramp down) is important. This means that we will continue to add 5% of our income into the fund on a consistent basis. A current work-in-progress for us is the building of options on how to do that if we aren’t receiving income in a traditional way any longer.
So far, we’re compiling income from book royalties, this blog, and work arrangements like consulting for a month out of the year on passion projects. The key is that we continue to assist our superfunds to grow rather than stay idle – this is what’s going to help compounding interest work its magic ultimately. To understand what retirement figures would best suit you and the kind of retirement you want to have, this retirement calculator can help.
Additional ways to maximise super:
- Find lost super (ATO) and consolidate it.
- If you’re a lower income earner, you may be eligible for the government co-contribution of $500.
- Cost cut: Canstar reported that just $33 a week can net you an extra $121,267 by 67 (you’re often recommended to take from things like coffees, takeaway, manicures and life’s other little luxuries. If these make you happy though, especially after years of a pandemic, I think there are more efficient ways to find extra money. Reviewing insurances and starting a side hustle are two places to start. I found an additional $1000 simply by doing frugal February, you’re already halfway there in one month by doing that.