How the average Aussie wage earner can build a $3 million superannuation nest egg
Save $3 million in 30 years? At first glance, this goal seems impossible. After all, how could anyone earning an average wage of ~$85,000 today save such a huge amount of money?
When Federal Treasurer Jim Chalmers announced plans to tax earnings on superannuation balances over $3 million at 30%, double the current concessional rate, from July 1, 2025, he said it would only affect a very small proportion of Australians.
The reform was set to only affect 0.5% of Australians or 80,000 super fund members. So, many Aussies when they heard the news thought it was not going to affect them.
But the team at online investment advisor Stockspot has crunched the numbers and it turns out that $3 million figure could be attainable to people on the average wage.
What is key to note is Chalmers also said the $3 million cap won’t be indexed. So, if not indexed, inflation plus compounding earnings within super could push more Aussies over the threshold in coming decades.
Stockspot Senior Manager – Investments and Business Initiatives Marc Jocum said the key to saving $3 million in 30 years isn’t about earning a high salary or even winning the lottery.
“It is about smart investing today, savvy budgeting and a commitment to your retirement,” he said.
Stockspot have based the calculations on a salary of $84,380.40, which is an average based on Australian Bureau of Statistics figures.
The salary increases at 2.3% annually, which is the average of past 10 years of wage YOY growth.
The starting super at the age of 35 is $75,167 is based on Association of Superannuation Funds of Australia Limited (ASFA) data.
Super growth at 7% is in line with the average super fund performance according to Stockspot’s Fat Cat Funds Report, which has been published annually for the past 10 years.
The superannuation guarantee rate is 10.5%, which is set to rise to 11% on July 1, 2023, 11.5% on July 1, 2024 and 12% from July, 1, 2025% onwards.
The salary sacrifice amount is set to 3% annually, while an additional non-concessional contribution is based on a hypothetical $5,000 annually.
A better fund performance has been set at 1% each year.
Let’s look at how the average Aussie wage earner over 30 years can boost their super balance to $3 million.
(Click to scroll)
Please note the extra non-concessional contributions column also includes salary sacrificing, while the Better Super Fund column also includes salary sacrificing + extra non-concessional contributions.
This table takes into account the $1.7 million transfer cap limitation of non-concessional contributions, not indexed to inflation.
Jocum said with the average superannuation balance in 2023 for a 35-year-old being $75k, a $3 million nest egg may seem like an impossible target to aspire.
“However, the short answer is it is achievable for the average investor today to retire by 2053 and have more than $3 million in super” he said.
Jocum said the three strategies of salary sacrificing 3% of their income into super, plus adding a $5k non-concessional contribution, plus looking for a fund that better performs each year on top of the super guarantee can get them to the target by 65.
According to the Stockspot figures it can get people to a super balance of $3,043,112.
Jocum said importantly people should seek advice from a financial professional before employing any of the strategies.
“This is an arrangement where an employee agrees to give up a portion of their salary in exchange for higher superannuation contributions,” Jocum said.
“Employees should ask their employer if this is something they can offer and ensure it’s in accordance with the current concessional contribution cap of $27,500.”
Jocum said non-concessional contributions are after-tax contributions Australians can put into their super from their earnings and savings.
He said non-concessional contributions can help boost a superannuation balance with the amount currently capped at $110,000 per year.
The third strategy worth considering is choosing a low-cost and better-performing super fund.
Our decade-long research has found that Australians can be about $245,000 better off over their lifetime if they’re in a low-cost fund.
Fees are like termites that eat into investor returns, so every dollar saved is more for an Australian’s retirement.
Jocum said a final extra strategy is to consider up-skilling your professional skills to enhance knowledge and proficiency in a certain field.
“This can help individuals to increase their earnings potential by making them more competitive in the job market or by allowing them to take on higher-paying roles, and thus can increase their superannuation guarantee concessional contributions, too,” he said.
“Considering wage growth has on average increased 2.3% per annum over the past 10 years, this strategy may involve some initial study, but can pay off over the long-term for their superannuation nest egg.”
He said combining these strategies, it is realistic that more Aussies can accumulate at least $3 million in their super balance, and therefore may be impacted by the new proposed government changes.
“These changes may have the unintended consequences of reducing concessional and non-concessional contributions to super (and people investing outside of super instead) because the perceived benefit of contributing to super is less, especially for people well off retirement who may reach the $3m cap one day,” he said.
Stockspot head of superannuation and partnerships Enid Lal said the government’s super reforms may have different consequences for members in a pooled superannuation fund or one supervised by the Australian Prudential Regulation Authority (APRA) versus an SMSF.
“For example, SMSFs will have to pay tax on unrealised gains if the member’s balance exceeds $3 million,” she said.
“The $3 million threshold will not be indexed, therefore causing future retirees to consider other options outside of super to boost their retirement savings.”
She said whilst the change would affect only 0.5% of super accounts, this number is likely to increase in the long term, causing a lack of confidence in our enviable superannuation system.
“Perhaps other measures, such as an overhaul of our tax system should be also considered rather than making piecemeal changes to tax and super,” she said.
“What worked 30 years ago, is not necessarily relevant in today’s environment and may not be relevant in the future.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article