Since contribution limits were introduced it has become even more important to start saving in super as early as possible, and the recent halving of the concessional contribution limit has reinforced this. There is no longer room to make large contributions at the end of your working life without incurring a tax penalty.

Let’s look at Roger and Anne who both aim to retire in 20 years time. Anne starts saving $20,000 per year in her super, and keeps it up for 20 years. When she retires her savings have accumulated with investment earnings to $470,000. Roger doesn’t save anything for the first 4 years and then decides he would like to contribute $40,000 per year for the next ten years – the same overall dollar amount as Anne will save over 20 years. He calculates these contributions plus accumulated investment earnings should be worth about $480,000 by the time he retires, putting him on a par with Anne.

When Roger investigates, he finds he can’t contribute more than $25,000 per year without incurring a large tax penalty, so he has to change his strategy and contribute $25,000 per year for the 16 years remaining before he retires. When the time comes to retire, Roger has $440,000 – around $30,000 less than Anne, even though they have contributed the same overall amount. By saving early Anne has avoided being adversely impacted by the contribution limit and her contributions have grown more than Roger’s because her funds have been invested and working for her for longer.

MKT/2185/0809

¹ For ease of illustration and to show figures which are in “today’s dollars”, inflation has been assumed to be nil (including assuming that the contribution limit will be a constant $25,000. The limit will actually be indexed to Average Weekly Ordinary Time Earnings in increments of $5,000 over time).

² A constant ‘real’ investment return. (ie investment return above inflation) of 3% pa has been assumed.  Actual investment returns can fluctuate significantly from year to year and the degree of variability in returns will affect the outcome of these scenarios.

³ The contributions are assumed to be “concessional” contributions ie employer or salary sacrifice and contributions tax of 15% has been deducted.