Treating your super like a child? Bit of a strong statement, you might think?
Well, I stand by it. And here's why.
What's the big deal about superannuation?
Superannuation is the national retirement savings scheme. It's the main thing helping the average Australian live out their retirement without relying solely on the age pension.
There's nothing wrong with the pension in itself, don't get me wrong.
But the Keating government initiated compulsory superannuation based on the acceptance that we as a country couldn't afford to rely solely on the pension as a universal retirement income scheme.
That's unfortunately what happens when you have an ageing population. And according to the 2016–17 NSW Intergenerational Report, titled 'Future State NSW in 2056', the NSW Government expects that by the year 2056, there will be just 2 workers for every 1 retiree (persons aged over 65) in the state, down from a 4:1 ratio in 2016.
So you can see why a universal aged pension is not sustainable going forward.
That brings me back to super. The government knows we have a demographics problem. That's why it has allowed generous tax benefits for using super. Most earnings that go into super (a compulsory 9.5% of most workers' salary) are taxed at 15% instead of at a workers' marginal tax rate.
Earnings within super (such as dividends or interest) are also taxed at 15%. And once a super fund switches into 'pension phase' (i.e. when a worker retires and begins to live off super), then any earnings are tax free. So you can think of super as basically a legal tax haven of sorts.
Why super is so super
All of these facets of the superannuation scheme make it a highly lucrative vehicle you can use to build wealth. But raising your super fund to maturity requires years of patience and discipline (I hope you're getting the 'child' reference now).
Super works so well because it enables us to harness the miracle of compound interest through investing in growth assets like ASX shares. Einstein reportedly described compound interest as the '8th wonder of the world'. It requires time and good returns to work its magic though — helped of course by regular, blind and automated contributions over decades. It's how you can turn $100,000 worth of contributions earning 8% annually over 45 years into almost $1.5 million.
Minimising fees and maximising contributions is the best way to get this ball rolling. And withdrawing money early is the best way to kneecap it.
That's why I was dismayed to hear that more than half a million Australians have now completely wiped out their super balances under the government's program that allows early withdrawals.
Most of these people are reportedly under 35. That's half a million of us with severely diminished prospects of a comfortable retirement. It's not good for them, it's not good for our budget, it's not good for our future level of taxation and it's not good for the country, in my view.
Foolish takeaway
If you're one of those people who has withdrawn your super, I highly recommend topping it back up when circumstances allow. Super should be your reward of a lifetime of hard work. Don't treat it as a bank to be raided, it needs nurturing and a bit of love instead. That's the best shot you have of your super looking after you in old age
