Let's begin with the obvious question. What is superannuation? Superannuation, or super, is the money which is saved on your behalf for you to use when you retire. It's a system designed for and used by just about every working Australian – including you!
Money in your retirement sounds like a great idea but how does that actually work?
The superannuation lifecycle
Say you’re working right now. Your employer pays you a salary. Most of this goes to you and you can do whatever you want with it. But - you don't have to spend it all. Over time, you might want to save or invest some of your money. For example, you might buy an investment property, or put it into a savings account. That might sound a bit boring, but when you eventually stop working and retire, all the money you’ve saved will be used to support your lifestyle. The more money you’ve saved, the more lifestyle options you’ll have.
Sounds good, right? But how do you make that happen? What if you're not too good at saving money? Or you don't know much about investing?
That's where superannuation comes in. While you work, your employer is required by law to place a portion of your salary into a savings account that is managed by a super fund.
Just like your own savings, your super fund will invest your money for your retirement. Think about your superannuation as your personal savings, except that someone else is managing the investment for you. The big difference? You can't get that money until you're 60, the age when many people choose to retire.
So, let's recap. As you work, you will be saving and investing for your retirement. This is comprised of a) the money you've saved by yourself, and b) the money managed for you in your superannuation. When you eventually stop working, you will need this money to support your lifestyle. This is known as your retirement income.
That's why superannuation is super important!
Why should you care?
You might be asking yourself: Why can't I have all my money now? The reality is, for one reason or another, many people are not able to save enough money by themselves to fully support their lifestyle once they retire. The Australian Government will provide a benefit to retirees with low savings called the Age Pension. However, it's important to understand that the pension is only enough to support a fairly basic lifestyle. But with super, you can have the lifestyle you want because you don't need to rely on just the Age Pension. That's why the government has made superannuation savings compulsory.
Is a lot of work involved?
Do you need to do a lot of work to manage your super? It's up to you. While your super fund will grow your money for you, you do have a say in how that money is managed. That means you can influence how much superannuation you will eventually have. These decisions can range from changing where your super fund invests your money, to choosing a different super fund entirely.
Much like servicing a car, it’s worth checking your superannuation savings from time to time to see how it's performing. Small decisions you make now can have a big influence on how much money you have later, and get you where you need to be.
Now you know the basics of superannuation. However, that's not all. The growth of your super is not always guaranteed, and it's even possible to lose some of your super savings.
In our next video, we will look at how that can happen, and what you need to watch out for.
Update: An important clarification about your salary
An important clarification to make is that your super is paid on top of your salary, at the 9.5% compulsory contribution rate. For example, if your salary is $100,000, then your super is $9,500. A common misconception is that super is like a tax that is being taken from your salary, whereas it is actually an additional amount that your employer must pay on your behalf.
A useful tip when looking at your employment contract is to clarify what your employer means by your 'salary', as some employers will include super in this figure, whilst others exclude. For example, Employer A may say your salary is $109,500 including super, whilst Employer B may say your salary is $100,000 excluding super. These are exactly the same.