Three reasons to build your nest egg soon

Three reasons to build your nest egg soon

Some tasks take longer than others. It might only take you a few hours to build a barbecue, while setting up a garden can take the better part of a day, if not a few days. In neither case can you bank on doing the job at a moment’s notice – you have to give yourself some time. 

The same goes for building a nest egg. What is superannuation if not a long-term task that can take the better part of a few decades? And much like these more common household tasks, the earlier you get started, the better the finished product will be.

Here are a few of the top reasons why this happens to be the case.

1. The power of compound interest

If you start saving early enough, you can harness the power of compound interest for your own purposes, making huge savings by the time you’re ready to retire. 

Essentially, compound interest is when you earn interest on your interest. With a compound interest account, if your savings earn interest and increase, then next time it’s due to accrue on your account it will be calculated on top of the larger, interest-boosted sum. This will happen each time, letting your savings snowball. 

If you start doing this in your early 20s, rather than your 30s, you could end up with potentially tens of thousands more worth of retirement savings. 

2. You might need more than you think

In September 2014, The Association of Superannuation Funds of Australia says you need around $23,363 a year for a modest lifestyle if you’re single, and $42,433 a year for a comfortable lifestyle. Yet a number of factors can make what you’ve saved up in your superannuation funds inadequate for retirement:

  • If you live longer than you expect
  • If living costs rise
  • If inflation takes its toll on prices
  • If unexpected health factors put a dent in your finances

Wouldn’t you want to be sure that you can take whatever life throws at you? Thinking about building a nest-egg early can help get you extra prepared, just in case. 

3. More time to use all the tricks of the trade

Superannuation in Australia has a variety of different tricks, techniques and benefits that one can take advantage of to boost an individual’s super. These include: 

  • Spouse contributions
  • Salary-sacrificing
  • Added personal contributions
  • Government co-contributions 

The earlier you start, the more time you have to make use of these benefits, a number of which are tax-free. It can also give you the freedom to come up with a cohesive retirement strategy based on these tools, potentially letting you experiment with what does and does not work.

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Learn more about superannuation

What will the superannuation fund do with my money?

Your money will be invested in an investment option of your choosing.

How much extra superannuation can I add to my fund?

There is an annual limit of $25,000 for concessional contributions – that is, money paid by your employer and extra money you pay into your account through salary sacrificing. There is also a limit on non-concessional contributions. Australians aged between 65 and 74 have a limit of $100,000 per year. Australians aged under 65 have a limit of $300,000 every three years.

How much is superannuation?

Superannuation is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Can I choose a superannuation fund or does my employer choose one for me?

Most people can choose their own superannuation fund. However, you might not have this option if you are a member of certain defined benefit funds or covered by certain industrial agreements. If you don’t choose a superannuation fund, your employer will choose one for you.

Am I entitled to superannuation if I'm not an Australian citizen?

Yes, permanent and temporary residents are entitled to superannuation.

What happens to my superannuation when I change jobs?

You can keep your superannuation fund for as long as you like, so nothing happens when you change jobs. Please note that some superannuation funds have special features for people who work with certain employers, so these features may no longer be available if you change jobs.

What is MySuper?

MySuper accounts are basic, low-fee accounts. If you don’t nominate a superannuation fund, your employer must choose one for you that offers a MySuper account.

MySuper accounts offer two investment options:

  1. Single diversified investment strategy

Your fund assigns you a risk strategy and investment profile, which remain unchanged throughout your working life.

  1. Lifecycle investment strategy

Your fund assigns you an investment strategy based on your age, and then changes it as you get older. Younger workers are given strategies that emphasise growth assets

What is the age pension's income test?

These are the rules for most people who want to claim the standard pension:

Single people

  • If your income per fortnight is up to $168, you’re entitled to a full pension
  • If your income per fortnight is over $168, your pension will reduce by 50 cents for each dollar over $168

Couples

  • If your income per fortnight is up to $300, you’re entitled to a full pension
  • If your income per fortnight is over $300, your pension will reduce by 50 cents for each dollar over $300

These are the rules for most people who want to claim the transitional pension:

Single people

  • If your income per fortnight is up to $168, you’re entitled to a full pension
  • If your income per fortnight is over $168, your pension will reduce by 40 cents for each dollar over $168

Couples

  • If your income per fortnight is up to $300, you’re entitled to a full pension
  • If your income per fortnight is over $300, your pension will reduce by 40 cents for each dollar over $300

For most people, the age pension cuts off if your fortnightly income exceeds these thresholds:

Category Fortnightly income
Standard pension for singles $1,944.60
Standard pension for couples living together $2,978.40
Standard pension for couples living apart due to ill health $3,853.20
Transitional pension for singles $2,038.00
Transitional pension for couples living together $3,317.00
Transitional pension for couples living apart due to ill health $4,040.00

What happens to my insurance cover if I change superannuation funds?

Some superannuation funds will allow you to transfer your insurance cover, without interruption, if you switch. However, others won’t. So it’s important you check before changing funds.

Is superannuation paid on unused annual leave?

If your employment is terminated, superannuation will not be paid on unused annual leave.

What happens if my employer falls behind on my superannuation payments?

The Australian Taxation Office will investigate if your employer falls behind on your superannuation payments or doesn’t pay at all. You can report your employer with this online tool.

How do I change my superannuation fund?

Changing superannuation funds is a common and straightforward process. You can do it through your MyGov account or by filling out a rollover form and sending it to your new fund. You’ll also have to provide proof of identity.

Is superannuation compulsory?

Superannuation is compulsory. Generally speaking, it can’t be touched until you’re at least 55 years old.

What should I know before getting an SMSF?

Four questions to ask yourself before taking out an SMSF include:

  1. Do I have enough superannuation to justify the higher set-up and running costs?
  2. Am I able to handle complicated compliance obligations?
  3. Am I willing to spend lots of time researching investment options?
  4. Do I have the skill to make big financial decisions?

It’s also worth remembering that ordinary superannuation funds usually offer discounted life insurance and disability insurance. These discounts would no longer be available if you decided to manage your own super.