Why do I need superannuation?

Super is all about having the financial future you want in retirement. It’s about building a nest egg to provide you with added protection in the years after you stop working. Yes, that seems a long way in the future but if we’re not good to our super now we may not achieve the financial future we want.

Superannuation is simply retirement savings. The key to saving for the long term is to start early, stay on top of it, keep adding, compounding, and having the right investing risk vs reward strategy for you. But sometimes, with lots of regulation changes and so on, it all seems more difficult.

Let’s bring it back to the basics. Start early. Anyone working in Australia and earning more than a certain amount should be receiving regular compulsory contributions to their super from their employer, which now means that many people are setting up their super from a much younger age than they used to; meaning they have more time to accumulate their savings and benefit from compounding interest.

Stay on top of it. As I said, at the moment, employers are required to pay a certain percentage of their employees’ wages into their superannuation fund as part of their pay which often means that people are unaware of the amount that is being saved, and sometimes where it is being saved.

Some people who have changed jobs regularly may have more than one super fund, and many have lost track of where their super is. By taking control of your super funds - knowing where your money is being saved, how much it’s earning, how much it’s costing you – you put yourself in a better position to make it work harder for you.

Keep adding. As mentioned, your employer is required to contribute to your super as part of your pay which means your savings keep growing each time you get paid. However, you are also able to make extra contributions, up to certain limits, yourself. Adding to your super can be a tax-effective way of saving for your future.

Compounding. The money you contribute to super is then invested to earn more money. Commonly, in addition to your regular contributions, your super investments grow in 2 ways. Firstly, any earnings on the investments - such as interest on deposits or dividends from shares - are reinvested, increasing the amount you have invested and potentially earning higher returns.

You may also achieve capital growth, such as an increase in share values, which also continues to increase your savings. Risk vs reward strategy. As we said, the money you contribute to your super is invested to earn more money. All investing comes with a level of risk.

As a general rule of thumb, the riskier the investment the higher the return and vice versa, the safer the investment the lower the return. The trick is to find the right balance for you. When you are young, you may elect to have riskier investments, earning more and growing your super faster. As you get older, you’ll be more conscious of not risking your savings and accepting a lower rate of return on a larger ‘pot of gold’.

So, why bother with super? Superannuation will play an important part in your financial future so it’s important to take care of it now. It’s a good idea to know how much you have saved, where it is being saved, how it’s invested and how much it’s earning, and how much you are paying in fees.

Curious to know more about finances? Have a look at the range of other Davidson Institute financial education resources on their website.