How to beef up your super

WHEN it comes to adding sizzle to your super, there are really only two tools that work - starting early and making regular contributions.

How to beef up your super

WHEN it comes to adding sizzle to your super, there are really only two tools that work.

First, and by far the most important, is the power of time: the longer your money is working for you, the better the outcome.

It's called compounding - the power of earning interest on interest and contributions over time.

Second, being a regular contributor also helps, regardless of whether the market is heading up or down. It's called dollar cost averaging, where you regularly put in the same amount every time over a period.

It works, but not as well as the power of time.

The power of time and compounding is highlighted in a new report from the accounting body CPA Australia, entitled Superannuation -- the right balance?

The benefits can be quite dramatic: it is in fact far better to start early and then stop than to start later and save twice as hard.

Here's the arithmetic:
* Katie starts saving at age 20. She invests $2080 a year. After 15 years she stops adding to her investment, but leaves it in the fund, earning 6.25 per cent a year.

At 65 she retires and collects her money. She invested $31,200 and receives $267,400.

* Scott starts saving at 40. He too invests $2080 a year, but continues investing $2080 every year, also at 6.25 per cent a year until he retires at 65. He invested $52,000 and receives $110,600.

The point is that because Katie started early, she collected more than twice as much as Scott.

How is this possible? Because Katie started early, time was on her side. Scott waited and lost 15 years' compounding power.

The sums assume that Katie and Scott both make undeducted or post-tax contributions of $40 a week or $2080 a year. Their savings earn a net annual return of 6.25 per cent, after tax, on fund earnings of 15 per cent and a management fee of 1.5 per cent.

CPA Australia says the world of super has improved in the past 12 months: it's more accessible, more flexible in its benefit options and more attractive as a wealth-builder.

Yet there is no room for complacency - an adequate retirement income still takes 40 years of 9 per cent compulsory super contributions and hopefully a bit more in voluntary savings.

Late starters won't have had time for their savings to build, nor many others.

"More needs to be done for Australians who don't fit the mould,'' says Michael Davison, CPA Australia's superannuation policy adviser.

"Women, people with broken work patterns, those forced into early retirement, and non-home owners will find it difficult in retirement.

"There are opportunities for the Government and the superannuation industry to work together to address these needs.''

Research for CPA Australia's report was done by the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra, which looked at the pre- and post-retirement living standards for 12 representative retirement groups, based on family type, income level and retirement age.

It might seem obvious that early contributions to super enjoy the benefits of compound interest much more than later ones, but the power can't be overstated.

For example, contributing 3 per cent of take-home pay into superannuation from age 25 onwards will increase retirement income by a quarter.

On the other hand, delaying a superannuation top-up plan until age 45, for example, requires contributing between 9 per cent and 18 per cent of take-home pay to get the same effect. That's hard with a mortgage and family to feed.

The only real option thereafter is to work longer. The earlier you retire, the less time you have to build up a nest egg and the more years you have to cover.

In terms of your super pension, to retire at age 55 after 30 years of super contributions requires double the annual contribution of retiring at 65 after 40 years of contributions.

Higher-income earners will face the biggest lifestyle shock if they retire early, according to CPA Australia.

A single male who earns around $77,000 in today's dollars and chooses to retire at 55 will more than halve his retirement income compared with an equivalent earner who continues working until 65.

In contrast, a single male on a low income (about $34,000) will experience only a 20 per cent drop in retirement income if he stops working at 55.

All of this assumes that the super funds maintain their game. The above numbers require funds to earn an average return of 4.5 per cent a year, which is conservative, given past history.

But if this average return was one percentage point lower at 3.5 per cent, contributions would need to increase by 30 per cent to maintain the same level of income in retirement.

Renters need more super than home owners in retirement, particularly if they are single. Prior to retirement, renters and home owners tend to have similar housing costs, because rent and mortgage payments absorb about the same proportion of income.

But in retirement, home owners tend to own their homes outright, so they fare better than renters at this stage of life.

Indeed, renters, on average, are 17 per cent worse off, with single renters barely managing a modest but adequate lifestyle in retirement.

A final word: add a bit more than the minimum if you can. Making a 6 per cent voluntary (after-tax) contribution to super will typically decrease your working life income by 10 per cent but increase your retirement income by almost 50 per cent.

A copy of the report is available at: http://www.cpaaustralia.com.au