Increasing your superannuation contributions can enhance your nest egg for retirement, yet with numerous pressing financial obligations, how can you determine the optimal moment to make additional payments?
Based on ASIC's Moneysmart, someone who starts at age 30 and contributes an additional $20 each week might find themselves $50,000 richer upon retiring. Additionally, they may benefit from tax reductions due to extra superannuation payments.
However, coming up with funds to save can be challenging, particularly within today’s financial climate, and boosting contributions to your superannuation may not always be the best strategy.
We consulted with two specialists to delve into when this approach proves beneficial and assist you in grasping both the advantages and disadvantages involved.
First, cover the basics
Kate McCallum is a financial advisor and co-writer of The Joy of Money.
According to Ms McCallum, if you find yourself in your 20s, 30s, or 40s, you may encounter significant financial pressures. These could involve paying rent, accumulating savings for homeownership, managing mortgage debts, covering educational fees, and handling everyday living costs.
If you carry consumer debts like credit card balances or personal loans, it’s more important to pay these off before increasing your Superannuation contributions.
This is due to the fact that the interest rates on these items are elevated, and clearing them offers a surefire way to earn returns.
It's equally advisable to possess an emergency fund — preferably sufficient to cover a minimum of three months' worth of living costs.
Aside from providing mental tranquility, this can also prevent the necessity of taking on debt for unforeseen costs.
Why young individuals ought to consider the implications of making additional contributions to their superannuation.
Ms McCallum emphasizes the importance of assessing your complete financial circumstances and objectives prior to thinking about increasing your superannuation contributions.
Significantly, the majority of individuals cannot withdraw their superannuation until they attain their preservation age, typically ranging from 55 to 60 years old, based on their birth date.
Therefore, if you're 30 years old and decide to make a voluntary contribution to your superannuation, you might be tying up those funds for over three decades.
Ms McCallum indicates that voluntary superannuation contributions tend to be more feasible for individuals above 45 years old, since they won't have to wait as long before accessing these funds.
Rather than doing so, she recommends that young individuals concentrate on different priorities and depend on the compulsory superannuation guarantee payments made by their employers.
"If you're in your 20s, 30s, or possibly even early 40s, it’s wise to let the super guarantee function as intended and allocate extra funds to other areas for greater financial adaptability," she explains.
If you want to invest, while still having access to your money, you can always do it outside of your superannuation. For example, you might decide to use the money to invest in a managed fund or exchange-traded fund (ETF) instead.
Alternatively, if you possess a mortgage, you might opt to retain the funds within an offset or redraw account instead.
How making voluntary superannuation contributions might assist you in reducing your tax liability
You have the option to contribute "concessionally" to your super account by arranging a salary sacrifice with your employer or directly transferring funds into your super account and then claiming a tax deduction.
This approach may seem appealing since these contributions are taxed at just 15%, significantly lower than the 30% paid by individuals earning an average salary in Australia.
Therefore, as your earnings increase, contributing extra to your super becomes more appealing because the tax advantage will be greater.
Is it advisable to contribute to your superannuation fund when you're temporarily stepping back from work?
If you're stepping back from work due to having a child or providing care for another person, you may be concerned about your superannuation balance and considering whether you should make additional contributions.
Even though you can continue adding to your superannuation during these times, you might be earning less money, potentially decreasing the possible tax advantages of making concessional contributions.
If your income is below $40,000 and you have a partner, the following may apply: contribute to your superannuation on your behalf and apply for a tax refund of up to $540.
Another approach some partners adopt is referred to as contribution splitting This includes transferring part of one partner’s superannuation contributions to their spouse.
How contributing more to your superannuation can assist you in saving up for your first house.
Although many individuals aren't able to access their superannuation until they reach their 60s, several exemptions do apply.
Under the First Home Super Saver (FHSS) program, first-time homebuyers can withdraw up to $50,000 in voluntary contributions along with their associated earnings to use toward saving for a down payment.
The scheme has complex rules Including aspects related to withdrawals, which is why it hasn’t gained much popularity. However, independent financial advisor Jacie Taylor suggests that this approach can be beneficial for individuals aiming to save for a home deposit.
"What a fantastic initiative this is, but unfortunately, it hasn’t gained enough awareness among the public," Ms Taylor remarks.
Remember that failing to buy a property after withdrawing funds from the scheme may result in tax penalties.
You might have the option to increase your superannuation without making additional payments.
If you can't make additional contributions, there are still various methods to ensure your superannuation is working efficiently for you.
Ms Taylor emphasizes the significance of examining how your superannuation is invested and the fees you're charged.
Ms Taylor suggests that if you're younger, you might consider opting for higher growth investment options with your super, since these generally offer better returns over an extended period.
"This really matters for younger individuals," she states.
If you're uncertain whether a voluntary super contribution strategy suits your needs, it may be beneficial to consult with a financial advisor or planner.
The content of this article provides only general details. It would be wise to seek specialized professional guidance tailored to your specific situation.