Why now is the perfect time to boost your superannuation fund and reap the rewards

A leading finance expert has revealed why now is better time than any time to boost your superannuation fund and reap the rewards.

The superannuation market in Australia has had a wild ride over the last year, riding the wave of the fastest interest rate tightening cycle in a generation as the financial world comes to terms with post-Covid reality.

Investment markets have been up, down, and sideways through that time, and most Aussies with a superannuation fund through this period have had cause for some concern.

But on the flip side of fear and uncertainty comes opportunity, and investors who put in the time to make smart moves today will come through this period of disruption in a stronger position.

So is now the right time to contribute to your super fund?

Market movements

When investment markets are volatile, most investors hit pause. Recent data shows investors are putting more of their money into cash as opposed to investing, at a pace only seen in the depths of the Covid pandemic.

But consider this example via investment powerhouse Pearler.

If you’d invested $10k into the S & P500 (500 largest US companies) 30 years ago, that money would be worth $208k today. But if you’d missed the ten best days in investment markets over this period, your money would have only grown to $95k. And worse, if you’d not been investing on the 30 best days over this period, you’d only have $36k.

The Australian superannuation market has undergone a turbulent journey over the past year.

To put these figures in context, we’re only talking about not investing on 0.001 per cent or 0.003 per cent of days (10 or 30 days in a 30 year period of 10,958 days) – but the difference to your investment balance is 54 per cent or 83 per cent less.

And further, when these ‘best days’ happened might surprise you. 50 per cent or a full half of the ‘best days’ in markets happened during a ‘bear market’, defined as a period where markets are down by 20 per cent or more. A further 28 per cent of the best days in markets happened right at the start of a market recovery, as markets were starting on the way back up after a period of decline.

See here’s the thing – most people think they’re being smart and strategic by not investing when investment markets are volatile – but they don’t realise they’re actually setting themselves up for failure.

This data shows us that if you want to invest for growth and success, you need to be investing constantly across all market conditions.

Investors have encountered volatility and uncertainty, presenting both challenges and opportunities.

Hello, tax savings

On top of the investment benefits of investing while markets are moving, your superannuation gives you some substantial tax benefits on top.

Under the current rules, you can make tax deductible contributions of up to $27,500 to your super fund each year. This amount includes any funds your employer contributes on your behalf.

For someone earning the ABS Australian average income of $94,000, your marginal tax rate plus Medicare levy is 34.5 per cent. The tax on any deductible contributions to super is 15 per cent. So working backwards, the tax benefit of contributing to super equates to 19.5 per cent.

For someone earning $94,000, your employer would make compulsory super guarantee contributions of $9,870 in the current year, meaning you have room to make another $17,630 in tax deductible contributions.

Based on a contribution of $17,630 and a tax benefit of 19.5 per cent, the tax benefit available to you this year is $3,438.

And this is all on top of any investment gains you receive.

And further, once your money is invested inside superannuation, the maximum rate of tax you pay on your super investment earnings is 15 per cent. This is much lower than marginal tax rates, meaning your investments inside super are able to grow at a faster rate than money invested in your personal name.

Timing and making strategic moves are key considerations for investors to navigate this disruptive period and emerge stronger.

What are the risks of contributing to super?

If you’re thinking about putting extra money into your super, there are two big risks to look out for.

Firstly, in most super funds your money will be invested into the sharemarket – meaning the value of your investments will fluctuate based on what’s going on in markets. This is completely natural and should be expected, but with slightly higher levels of uncertainty in the market today it’s critical you choose good investments.

Good investments are ones that will perform well over the long term. This way, even if markets are down in the short term, you can have confidence your funds will recover and ultimately make you money over the long term.

There are a lot of different ways to be right when it comes to investing, but the statistics show that index funds perform best more than 80 per cent of the time – if you’re not an investing pro, this can be a good starting point for your research.

Contributing to superannuation offers tax benefits, but it’s essential to carefully manage risks and plan for long-term growth.

The second big risk with super is that your money is effectively ‘trapped’ until you reach the access age of 60 under the current rules. The implication is that you should only invest money you don’t need outside of super, i.e. your house deposit fund or money you might need before retirement.

Careful planning here on both fronts will pay big dividends over time, so take the time to get it right.

The wrap

Pretty much everyone has a superannuation fund, but most of us don’t give it too much thought.

A small amount of attention goes a long way here.

Consistent investing across all market conditions will seriously pay off over time, and on top of the investing upside there are a stack of tax benefits you get from super that make it one of the most tax effective places to build your wealth.

The rules can be a little complicated and confusing, and it’s crucial you understand and manage your risks. But the benefits of getting this right are huge, and worth looking closely at.

Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth, the creator of the Smart Money Accelerator, author of Replace Your Salary by Investing and host of the Mo Money podcast. He runs regular free online money education event which you can book here