In superannuation, jargon and technical terminology tends to push people away. So if you're feeling a bit confused by it all, here are the ideas you need to get your head around.
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1. Super is a tax arrangement: It is not an investment. You are putting money aside for your retirement (9 per cent of wages) and the government encourages you to do this with tax benefits on contributions and investment earnings.
2. Super is income replacement: When you no longer work for income, you'll need to replace this income using your assets. The income-replacement rate is the percentage of your working-life salary that you'll need to earn in retirement. The sweet spot for singles is about 70 per cent of your average salary to live comfortably. For couples, it's more like 55 per cent of combined salaries.
3. Establishing a goal: You'll need assets to generate your replacement income. So, you need a goal. Assume that your investments return 5 per cent per annum. This means you must have enough assets so that when they earn 5 per cent a year, they produce your replacement income. For example, if you earn $60,000 a year, you'll need a lump sum of $840,000 to replace your working-life income.
4. The compound effect: Often referred to as earning interest on interest. It works like this: if you put $1000 into a fund that returns 10 per cent, after one year, you'll earn $100 in interest. If you reinvest the principal amount plus the interest ($1100), next year you will have $1210. By reinvesting like this, you will double your money in seven years. Add a regular contribution over 40 years, and with occasional lump sums in a tax-concessional fund, and the compound effect is turbocharged.
5. Planning: Most super funds cater to people wanting low volatility and low returns, through to high volatility and high returns. Generally, people close to retirement choose the former and people in their 20s the latter - they have time to weather downturns and make gains.
Complexity aside, most Australians can create a retirement plan with a pad, a pen and an internet connection (remember to only rely on information from organisations with an Australian Financial Services Licence. Complexities will emerge - they always do - but you can start towards a comfortable retirement by taking control, setting a plan and empowering yourself to pursue your goals.
Mark Bouris is chairman of financial services group Yellow Brick Road.
