Should you make additional super contributions?

Extra super contributions

Employers must contribute 9.5% of your salary (up to a maximum of $20,050 p.a.) into super. But should you make additional super contributions? This is a question I’m asked regularly.

Of course, like many financial planning matters, the answer does depend on your individual circumstances. However, there are some fundamental concepts that help us understand whether additional contributions are going to help you achieve your financial goals.

The power of starting early

Susie is a 30-year-old earning a salary of $100,000 a year. Therefore, she is already contributing $9,500 per annum into super (i.e. her employer’s contributions). If Susie contributed an extra 3.5% p.a. of her gross salary (i.e. $3,500 p.a. or $67 per week), by age 60, her super balance would be 32% higher ($965,000 versus $1.27 million). That is a big reward for a relatively small sacrifice.

Compare this to someone who starts a lot later in life. Matt is 50-years-old and his super balance is $400,000. Matt’s salary is $150,000 per annum so his employer is contributing $14,250 per annum into super. If Matt makes additional contributions so that his total contributions equal the concessional contribution cap (i.e. the maximum you can contribute – currently $25,000 per annum), by age 60, Matt’s super balance will only be 13% higher ($845,000 versus $955,000). I think you’ll agree that that’s a relatively small reward for a significant amount of additional contributions (approximately $100,000 in additional contributions over 10 years).

The above two examples demonstrate that making additional contributions is a relatively ineffective investment strategy unless you begin making them when you’re in your 30’s. That is not to say that you shouldn’t make them as it is a good force-savings plan. However, it means that you probably need to think of other investment strategies that you can implement in addition to super contributions.

Worried about locking your money away inside super?

Some people choose not to make additional super contributions because they are worried that the government will change the rules on them and they won’t be able to access their savings to fund retirement. Whilst it is inevitable that the government will continue to tinker with the superannuation rules, it doesn’t mean that we should ignore super altogether. The superannuation environment provides some taxation benefits – so ignore them at your own peril. I believe that super should play a material role in most people’s retirement strategies. Of course, we need to be careful about being to super-centric – particularly for people that are more than 10 years away from being able to access their super. Suffice to say that ignoring super in totality is probably not in your best interest.

Repay your home loan, invest in property, or super?

It is important that you invest in the right order – as I explain in this video. For some people in their 30’s, making additional super contributions might not be the right priority. It might be more important to repay/reduce their home loan to reduce their interest rate exposure. There is no “one size fits all” solution – it really depends on your individual situation.

What else can you do to boost your super?

Firstly, there are three things you must optimise to maximise your super balance by the time you retire – as discussed in this video. Assuming you have done these three things correctly, what else can you do to boost your super balance? Probably the most effective strategy (and one that becomes even more attractive now that the government has reduced the concessional contribution cap to $25,000 per annum) is to use some of your super as a deposit towards investing in a property. Your super fund can then borrow the remainder of the funds to purchase said investment property. Gearing inside super is a powerful strategy for two reasons:

  1. There is more pressure on the government to reduce the tax benefits that higher income earners receive from making contributions into super. As such, tax-effectively diverting wealth into super (via contributions) will become more difficult to do. Borrowing mitigates this.
  2. For many people superannuation is a very long-term investment (20 years and beyond as most people won’t exhaust their super balance until they’re in their 80’s). This long-dated investment horizon lends itself well to a borrowing strategy (if you’ll excuse the pun) because it’s a long enough time to enjoy the immense benefits of compounding capital growth.

Of course, there are non-super investment strategies to consider as well

The point of my article is not to discourage you from making additional super contributions. On the contrary, it is never a bad idea to save/invest monies for the future. However, what I would invite you to consider is that superannuation and any contributions thereof should be only one of many things (tactics) that you are doing to build wealth. Put simply, a balanced approach typically yields the best outcomes (i.e. not being too focused on super and not ignoring it altogether either).

If you have any questions about what I have discussed above, I would invite you to contact us.

Please note: ProSolution Private Clients does not receive any revenue (commissions, referral fees, etc.) or non-financial benefits from recommending any superannuation funds or super investments.