Superannuation: How young people can end up $419,000 richer

Millennials and Gen Z could use this long term wealth strategy to score themselves hundreds of thousands. Here’s how to do it.

Younger Aussies could become up to $419,000 richer by implementing this easy hack by the time they are 35.

The hack involves salary sacrificing into your superannuation fund and can make an “astounding” difference to the future but also deliver immediate tax benefits too, according to one expert.

Yet despite the important role of people’s retirement funds, a third of Aussies don’t even know much money is in there superannuation pot, a Canstar’s survey showed.

It found over a fifth of Australians think they’ll need $1 million or more to fund their retirement, but just 39 per cent feel they’re on track to hit their savings goal.

Salary sacrificing can't only help bring in the money for retirement, according to financial comparison provider Canstar, but also works as a long term wealth strategy.

It involves making an arrangement with your employer for an agreed amount to be deducted from your pre-tax pay and put towards your super.

Including your employer’s contribution, you can make up to $27,500 in super contributions a year. Picture: iStock

Here’s how it works. Take a 35-year-old Aussie worker earning the typical annual income of $77,948 and who has a starting super balance of $61,247.

They could top up their superannuation through salary sacrificing by between $104,750 and $419,000 assuming they will retire at age 67.

If the worker were to solely rely on employer super contributions mandated by the government, they would retire with a super balance of $694,275 – well short of many Aussies $1 million goal.

However, it they started salary sacrificing 2.5 per cent of their annual before-tax income from age 35 on top of their employer contributions, they would be $104,751 better off in retirement, with an overall superannuation balance of $799,026.

Someone could reach the $1 million goal by salary sacrificing 7.5 per cent from the age 35, helping them to become $314,253 better off in retirement, while their overall super balance would hit $1,008,528.

If they went a step further and salary sacrificed 10 per cent of their annual income until age 67, they would be $419,000 better off, with a retirement balance of $1,113, 279.

There are ways to get to a $1 million super balance. Picture: Getty Images

Steve Mickenbecker, Canstar’s finance expert, said making regular contributions into superannuation over and above what the employer pays can make a huge difference to your retirement balance.

“Most Australian employees nominate a superannuation fund to take the compulsory contributions made by their employer, and then set and forget it. However, this means they miss an opportunity to greatly improve their retirement lifestyle,” he said.

“Employees can salary sacrifice into their superannuation up to a concessional contribution maximum of $27,500, including the employer contribution, which is taxed at 15 per cent for most employees instead of what is usually a higher marginal tax rate.

“Even a modest salary sacrifice delivers immediate tax advantages, and in the long term the power of compounding, where you earn interest on interest, can result in an astounding growth in retirement savings.”

Steve Mickenbecker, group executive, financial services, at Canstar. Picture: Supplied

While it’s never too late to sacrifice salary into superannuation, Mr Mickenbecker said the best time to do it is when you still have plenty of years ahead of you in the workforce.

“In saying that, people need to remember that they are usually tying up the money salary sacrificed into super until they reach retirement age,” he said.

“This means they generally can’t use the funds to put towards buying a home or other unforeseen uses.”

The Association of Superannuation Funds of Australia estimates that the amount needed by a couple retiring in 2021 to live comfortably in retirement was $640,000.

“This estimate assumes that the retirees live in a home they own, demonstrating that retirement planning needs to factor in multiple financial goals,” he added.