Abbott's freeze on super increase isn't that simple
LAST week the government put a temporary freeze on the increases in compulsory employer superannuation.
There was the predictable outcry in the media - one paper even featured a woman aged 26 who was earning $60,000 a year and who they claimed would have $28,000 less when she retired.
According to her it would make it harder to retire as early as she had hoped.
Everybody had missed the main point - the amount you have in your superannuation when you retire will depend mainly on how long you have been contributing, and the rate of return you can achieve. The amount of the contribution becomes increasingly irrelevant as time passes and the earnings become way more than the contributions.
Let's take the example I just mentioned. Assume she has $20,000 in superannuation now, the employer contribution remains at 9.5% and her salary increases by 4% per annum.
If her superannuation averaged 10% per annum it would be worth $4.8 million at age 67. But, if she only managed 7% per annum the balance would be just $2.2 million. Notice the huge effect a difference in rate can make. And also how trivial the alleged $28,000 shortfall is in the scheme of things.
The other big factor is time. Suppose she did manage to achieve 10%. If she achieved her goal of stopping work early, let's say at age 60, her superannuation would be worth just $2.4 million. However, if she had a change of heart and worked till age 70 it would be worth $6.5 million. The combination of a high earning rate and 10 years more time for compounding in to work its magic is worth $4 million.
Increasing life expectancies coupled with growing pressure on government finances mean that Australians need to get the best return on the superannuation possible so they can live well in retirement. Unfortunately, misleading newspaper articles can cause them to focus on the immaterial and ignore the main game.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.