Congratulations on showing even passing interest in super at such an early stage of your career! A little bit of forward thinking at this stage will be a major factor in defining your wealth long-term. Small steps like ensuring you’re in an appropriate super fund, in the right asset allocation and optimizing your contributions have a massive effect when played out over 30 or 40 years of compound growth on your side! If you have a little less time don’t worry. It’s still likely the longest stretch of time you will invest.
Super Powers: Compound Interest and Tax Minimisation
This graph demonstrates the amazing effect of compound interest over a 40 year period. By far the most powerful factor in your lifetime wealth is time investing.
These calculations are based on an intern earning $70,000 whose employer is contributing 9.5% contributions, taxed at 15% ($217/FN net). Growth is assumed at 7%, with 1% fee. This is assuming you never earn more than an average intern wage!
Unfortunately, inflation also has to be considered, so in today’s money this would be worth around $436000 (assuming 3% inflation).
Easy Guide to Super: Protect your Super from Highway Robbery
Fees are the next major factor that will make an impact on your long term wealth. Check what fees you are paying – ideally under 1%, over 2% and you are being taken for a ride.
Some financial advisors will try to get you signed up to as you advance in your career (and become more attractive targets for them) can charge up to 4%. Over time, these excessive fees just don’t pay off.
You’ve all heard the adverts – multiple super funds charge you multiple fees, and you’re best off combining them. Do you have any puny super balances from pre- or during medical school? If so, remember that tiny balance could grow significantly over 40 years…or be eaten up by fees and lost. You can probably get this done in ten minutes! The ATO can help locate your lost super, and you can roll super from one fund to the other directly on the same site. Alternatively, you can contact your super funds or find their “Rollover” forms on the website.
Insurance is a big topic. Check out what you have through your Super, think about what you need. Consider seeing an insurance broker if you feel you need better cover. Beware some super income protection is only for 2 years. If your super fund hasn’t received contributions or a rollover in 16 months your insurance gets cancelled, unless you contact them. If considering cancelling insurance, consider that if you develop a chronic medical condition in the meantime you may not be able to secure insurance again. If children are in your future you are likely to need significant insurance in the future.
Easy Guide to Super: Choose Carefully but Make the Decision
Choosing a super fund can seem overwhelming. Take an evening to look at the options and make a decision. Review this every ~ 5 years or when you change employers. Canstar has a great resource to help review your employer’s default fund, and narrow down alternatives if appropriate. Important factors to look at are fees, insurance, and long-term performance (Over 10+ years).
Asset allocation is another important decision that you should consider early in your intern year. If you do not make a choice, your super will generally be put in to a default “Balanced” fund. When thinking about asset allocation, consider number of years to retirement – generally consider more aggressive allocations with longer to go before retirement. More aggressive portfolios are expected to deliver higher returns over the long-term, but are associated with higher volatility. If you choose a higher volatility fund, you need to be able to ride out severe market downturns. If you are going to panic and sell during a market crash, a lower volatility choice is likely to perform better for you. MoneySmart have an article on choosing your fund allocation.
Optimise Contributions – Claim All Free Money Available
When I signed up for my first post, I stared at the super options (including how much to contribute) in confusion and followed the advise of a random HR person as to which box to tick! I’m hoping you will go in a bit better informed! You will have an option to designate a super fund or allow your employer to pay in to their default fund on your behalf. A minimum of 9.5% is paid by your employer in to your super by law, but some employers will pay extra if you contribute voluntarily. I encourage you to contribute what you need to get the full extra employer contribution if it’s an option. Again, its free money, and you will never miss it if this starts from your 1st paycheck!
In your 1st year, and any time you take a career break you have a special opportunity to claim free money in to super. if you have income less than $37697 (which is likely in your intern year as you start work half way through the tax year), and make a voluntary contribution of $1000 (or $40 per fortnight) the government will give you $500 free money (into super)! That is a 50% guaranteed, risk free return! If anyone else offers you this, they are probably trying to scam you, it’s too good to be true. Even if you earn up to ~$50,000 in a financial year, you will get some benefit. Details on the ATO website, but it’s very simple to set up a BPAY every pay cycle to your super account and then claim it at your tax return. Amazingly, if you claimed the 1st year’s co-contribution and then continued paying the extra $40 per fortnight into super over 40 years you would be $177,043 better off (Assuming Net 6% growth).
The biggest factor that puts people off putting extra cash into super is legislative risk. The government have a habit of fiddling with super, and delays to future preservation age is likely. The lack of control you have over your super is a reason to be cautious about putting lots extra in years ahead, but small amounts really add up. Consider putting in an amount you won’t miss, especially when rewarded by a tax offset or co-contribution.
If you have worked through this list, I think you’re WAY ahead of the pack in building your future wealth. Good luck with your intern year, I hope your patients are interesting and your colleagues supportive. Enjoy!
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