Early ac­tion puts re­tirees well in front

North West Telegraph - - Personal Finance - He­len Shield

Telling young adults not to worry about su­per­an­nu­a­tion has to be the most costly — and spec­tac­u­larly bad — ad­vice ever.

Its shod­di­ness is mag­ni­fied for women who are more likely to have a big chunk of their lives with no in­come or a low in­come be­cause they have chil­dren.

It fool­ishly ig­nores what high­pro­file fi­nan­cial ad­viser Noel Whit­taker calls “the magic of com­pound­ing in­ter­est”.

The “magic” needs many years. A 40-year work­ing life is prob­a­bly ideal. But if you start early, even with small amounts, you earn in­ter­est, then in­ter­est on your in­ter­est. This is the “com­pound­ing” el­e­ment.

It’s sim­ple but it’s cru­cial. Leave it un­til later and it costs more than dou­ble to get the same re­sult. And so it is for su­per. Take a woman who starts work aged 20 on $50,000, grad­u­ates to the aver­age women’s wage of $75,000 at 25, has a child at 30 and does not earn again un­til she is 35.

From 35 to 40, she earns half the aver­age, then has aver­age earn­ings in her 40s and 50s. In her 60s, she cuts back.

If she re­lies on the 9.5 per cent com­pul­sory su­per and makes no ex­tra con­tri­bu­tions, she will have $493,000 at age 67 if her su­per earns the aver­age over the past 30 years.

For a “com­fort­able” re­tire­ment, you need $545,000, As­so­ci­a­tion of Su­per­an­nu­a­tion Funds of Aus­tralia says.

But let’s say when she starts work at 20, she pays $30 ex­tra a week into su­per. At 25, she gets a pro­mo­tion and makes it $50 un­til she turns 30.

If she never made an­other ex­tra pay­ment, at 67 she has $574,000.

Now com­pare this to a woman who made no ex­tra pay­ments and pan­ics when she turns 50.

To get near the $574,000 bal­ance set up ef­fort­lessly by Whit­taker’s “magic” in her 20s, she has to pay an ex­tra $100 a week un­til she turns 60. That gets her $572,000.

But it cost her $52,000 in her 50s, not $19,240 in her 20s. OPIN­ION

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