Are you wasting 11% of your salary? | Vanguard Super Retirement Series

Bryce: [00:00:31] Welcome to another episode of Equity Mates, a podcast where we explore what's possible in the world of investing. If you've just joined us for the first time, welcome! You're in for a treat this week. My name is Brice and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:45] I'm very good, Bryce. Very excited for this episode. And this week, because we are kicking off a week of superannuation. Nice. Proudly supported by Vanguard Super. Yes. Now superannuation. Let's talk about it. Let's chat.

Bryce: [00:01:03] We're going to talk about it over three episodes to start with you.

Alec: [00:01:06] Superannuation is the most important part of our investing and preparing for retirement journey. Yeah, a journey that we don't often think well, we don't think enough about. But we're here to say this is the time to think about it. Yeah, if you haven't thought about it, now it's time to start. If you do think about it, let's check in on how you are going. 

Bryce: [00:01:29] That's it. The purpose of this series. Over three episodes we're going to be discussing why super. Why it's important, why it's the biggest free kick in finance. We're going to look at some of the ways that you can maximise superannuation, ensure that you are on track and doing the right things, and then close out by discussing how superannuation can play an important role, no matter where you are on your investing journey. 

Alec: [00:01:53] Yeah, and I guess like the really common question we get is how much super should I have? And unfortunately, that's not a simple answer to that. But throughout this series, we want to talk about how you can sort of think about what amount of super you want at retirement and then like how much you need at different stages in your life to get there, and then what you can do at different stages in your life to make sure you're on track. 

Bryce: [00:02:17] Yeah, I'm looking forward to this series because I'm at a point of reviewing my super. So really looking forward to unpacking this. We've got a Vanguard expert joining us in our second episode on Wednesday, and then we'll close out on Friday. 

Alec: [00:02:30] As we said, this episode and this series is proudly supported by Vanguard Super. You probably know Vanguard's award winning ETFs, but did you know Vanguard's Super is winning awards too?

Bryce: [00:02:42] That's right, Ren, Vanguard's Super is backed by 40 years of global investment expertise. Plus it's low cost. So you keep more of what's yours.

Alec: [00:02:51] The Vanguard Super Lifestyle product has one of the lowest super fees on the market now, more than 30% lower than industry average. Whether you're just starting your career or planning your retirement, Vanguard has you covered. 

Bryce: [00:03:04] Head to Vanguard Squander. Use Slash Super to explore Vanguard's super. 

Alec: [00:03:09] Fee comparison based on super smart data. As at 31st March 2024, other fees and costs may apply. Vanguard Super Pay two while today is the trustee of Vanguard Super, read the relevant PDFs and today available@vanguard.com. I use super and consider if a product is right for you before making any financial decisions.

Bryce: [00:03:26] All right, Ren, let's kick it off. What are we going to cover in today's episode?

Alec: [00:03:30] So this episode's all about why super. We're gonna make the case that it's something worth caring about, and we're going to tell you why. 

Bryce: [00:03:38] It's Simon Sinek why? 

Alec: [00:03:41] I don't get the reference. 

Bryce: [00:03:42] You don't know Simon Sinek.

Alec: [00:03:43] I know that I am. He's like a motivational speaker. He got off track early in this episode. 

Bryce: [00:03:50] He's the guy who put up the, you know, the circle that for business leaders to think about all the crux of everything is the what. 

Alec: [00:03:57] All this stuff is like star signs for business people. It's like it's just corporate. Woo!

Bryce: [00:04:05] Yeah. Anyway, sorry. I'll be right about that. Anyway, let's get back to

Alec: [00:04:09] What these people are gonna hate about me. All right, well, we're gonna make the case. Why? You need to care about super. We're gonna talk about why super should be thought of as a tool. And it's a means to an end. Yeah. We're going to talk about why it's the only free kick you get in finance, why we're going to talk about the fact that too many Aussies aren't engaged. And there's some pretty surprising stats. And then finally, we're going to talk about why super is the foundation of retirement. 

Bryce: [00:04:40] So nothing new in here, but a great reminder, for why we should be paying attention to super.

Alec: [00:04:46] Yeah, but I think the foundation of good investing returns and the foundation of good superannuation is reminding yourself of the things that you need to remind yourself of and doing them consistently over and over again. And this sometimes means covering the same content. 

Bryce: [00:05:01] Yes, absolutely. And it's timely as well, because on my to do list is a review of my super, because I think it's always important as we'll get to. But let's start with the super. We often talk about superannuation in the context and environment of finance and investing. But the reality is superannuation is just a means to an end. For us, getting to retirement and living a long and happy life.

Alec: [00:05:29] Yeah, yeah, the end is the retirement that you want at the time. You want it. And in the same way that you don't sell a mortgage on the features of that product, you sell it on the dream of homeownership. Like we need to start thinking about super. And people need to start talking about super in the context of a comfortable retirement or choice in retirement, rather than on the intricacies of the financial product and the investment choices. Because, like, nothing turns people who aren't interested in investing off more than that. 

Bryce: [00:06:03] I feel like that's why so many people put it in the basket of I don't need to worry about it now because retirement is so far away. And also it's a finance product and it's a little bit confusing, and I don't understand that world. So I'm not going to have a conversation about it. But the reality is, as you said, Ren people are engaged in their mortgage and trying to understand that because they have the dream and aspiration of owning a home, the same sort of feeling and, I guess dedication towards understanding a financial product should go towards your superannuation. This is going to be your nest egg at retirement. And the difference between retiring comfortably and in a with the life that you want, and perhaps realising too late in life that you should have paid attention to it 20 years earlier. 

Alec: [00:06:48] For me the biggest thing is the when as well. So, Vanguard have done a study that will include in the show notes for all these episodes and that we've pulled a number of stats from, which has been really helpful in preparing this episode. But they found that they spoke to a number of people across all age demographics, but zooming in on people aged 18 to 34, the average person in that age bracket wanted to retire by 59.5 years old. And for me, the the big thing is like, we can all achieve our retirement goals and we'll talk to some of the numbers that really illustrate that. But the most important thing is that you really need to give yourself a solid 30 years at least, to let compounding do its thing. Put money away. Ideally for people who are, you know, in their 20s and 30s, you can give it 40 years, but like, you really need to give it a good run. Like it's hard to play catch up if you're only thinking about it when you've got ten years to go until you want to retire. And so for me, the biggest reason that you want to think about the retirement that you want and when you want to retire, when you're in your 20s and 30s, is because, you will then give yourself more choice about the when. 

Bryce: [00:08:02] Yeah, it's hard to view. It's hard to conceptualise the retirement that you want when you're in your 20s. That's very hard to do. All you need to conceptualise, though, is you want as much money as possible. 

Alec: [00:08:13] Oh, for me, that's me. All you want to conceptualise is you going to want choice. And choice as much as it sucks that money is so important to choose, it just is the reality of the system that we are in and it is a reality. 

Bryce: [00:08:27] Here's a question for you. When did you remember when you genuinely started thinking properly about your superannuation? 

Alec: [00:08:34] Yeah, when I started working at Coles in my first grad job, which coincided with around the time we started this podcast. So like 2017. So yeah. So I would have been like 25, 26 and like thinking about it seriously really was just choosing a fund that had good performance. But really for me at that time, it was like low cost and consolidating my super. And we'll talk about how you can consolidate your super. It is the easiest thing to do. But that was a big one because, you know, I had worked part time jobs at bars and retail and different places and sort of had super everywhere. Yeah. And so consolidating it and just putting it in one fund that I was comfortable with was literally the extent of me thinking seriously about super. And that's really all most people need to do early in their career. In the third episode of this series, we're going to talk about super through the ages. And in each decade of your life, some things that you should be thinking about and should be doing. So we'll get into that in more detail. But this isn't an arduous thing to start with. You're literally outsourcing it to a fund. So like, you just it's just about setting it up, right? 

Bryce: [00:09:48] So let's move on to why super, which is the whole point of this episode. And we want to start with the fact that it is a free kick or the only free kick when it comes to your finances. It is an incredibly powerful free kick when you get a reduced tax rate. This is a tax efficient finance vehicle.

Alec: [00:10:07] Yeah. So what we mean by that is that for most people the marginal tax rate, the tax that they pay on the last dollar that they earn is going to be either 32.5% or 37%. Some people who are killing it that lost it all. It might be taxed at 45%. Yes. But that's sort of the range that the average Australian is getting taxed at. Superannuation your contributions below the concessional cap. So there's a certain amount that you can contribute each year that gets taxed at 15%. And it might not feel like there's that much, 15%, 32% like what's the difference. But trust us that different compounds and that difference adds up. And it can often add up to significantly more or less choice in retirement.

Bryce: [00:10:59] Well, we've run the numbers here that show the difference or yeah, show the impact that this compounding effect can have year over year. And the differences between the 15% and the tax rates that we currently have for our income tax. So do you want to work through some examples, Ren. 

Alec: [00:11:18] Yeah. So according to the Australian Bureau of Statistics the median weekly earning in Australia is $1,300. The super guarantee is currently 11%. So that's $143 a week, 11% of 1300. So we've just said, all right, well, what does that look like if taxed at 15% or taxed at 32.5%? If taxed at 15%, you're left with $122 a week to invest. Let's say it's for 30 years at 8% annual return. So that's kind of like the broad market average. You've got $789,000 after 30 years. If that money was taxed at 32.5% instead, same inputs 30 years, 8%, you've got $628,000. So that's a difference of $161,000. Or put another way, you miss out on 20% of your returns if you're taxed at the 32.5% marginal tax rate. So that is like a 20% free kick that you're getting from that's the tax advantage of super. And that means a lot in retirement. 

Bryce: [00:12:28] Means a heap. it's just another. Yeah. This is just why you need to pay attention. 

Alec: [00:12:33] Yeah. Now you can change the assumptions and the core facts remains the same, let's say, rather than 30 years at 8%. We said 40 years at 10%. If you invest that $122 a week for 40 years at 10%, 3.35 million. Yeah, that extra ten years is massive for compounding. Which is why, again, we say starting early is so important. Because if you can go 

Bryce: [00:12:58] To relate that back to the number that you said earlier, 30 years, albeit the compound rate is a little bit less, but you had 789,000. An additional ten years slightly higher return each year. You're up at 3.35 million. 

Alec: [00:13:15] And that's why we say two things. The time is on your side because like the longer you extend the time horizon the compounding is exponential. But also that fees matter because you see the difference between 8% a year and 10% a year. It doesn't feel like a massive difference, but it is and if you're paying, if you have a choice between paying 2% in phase and 1% in phase, like a compound. 

Bryce: [00:13:39] Huge compound. 

Alec: [00:13:40] So to get to the end of my example, $122 a week, 40 years, 10%, 3.3 $5,000,000,0. 97 dollars a week, 40 years, 10% per annum, 2.66 million. So that's a difference of about $690,000, or about 21% of your returns. So really, like that's a lot of numbers to throw at you. And if you didn't keep up, that's okay because the key takeaway is super is a free kick. That lower tax rate on the concessional contributions means that you can invest more and that more can compound year after year after year. And so you want to make sure that that money that you're putting there, that your employer is putting there on your behalf, is in the right environment and is not getting too much taken away in fees and is getting good performance because it's the only free kick you get. So you got to take advantage of it. And it also means that as you start thinking about additional contributions over time, that's why additional contributions can be so powerful, because you can make the free kick bigger. 

Bryce: [00:14:44] Yeah. And if you're struggling to kind of comprehend, just think about this. If your employer comes to you and says, I'm going to take 11% of your income every time I pay you, I'm not going to tell you what I do with it because you're not engaged. Like, how do you feel about that? Like, you should, you should, you should want to know exactly what your employer is doing with that. 

Alec: [00:15:05] I mean, make it make it more personal. Like, let's say that you're, you're young and you're still living at home, and your parents say to you, I'm taking 11% of your pay and I'm going to invest it, but I'm not going to tell you anything about it. You'd be like, no, it's my money. I've earned it. Tell me about it. Do the same for your super fund.

Bryce: [00:15:24] Say yes. And if all you do in your investing life is focus on your superannuation, that is. That is fine. Because it is set up as rent said for a free kick tax advantage here. It is a vehicle to help you grow wealth as best as possible over a long period of time. 

Alec: [00:15:43] All right, Bryce, well, let's take a quick break here on the other side, we want to talk about some concerning numbers, about how Aussies aren't engaging with their super and then talk about why we think super is the foundation of our retirement. Before then, let's say a quick thanks to Vanguard's Super for sponsoring this superannuation series.

Bryce: [00:16:01] And as you know here, equity mates we hate fees. 

Alec: [00:16:06] After just over a year in the market, Vanguard Super have lowered their fees. Their award winning life cycle option now has one of the lowest fees on the market, more than 30% lower than industry average, with a yearly fee of just 0.56%, which bundles administration fees, investment fees and transaction costs. That's only $280 on a balance of $50,000. 

Bryce: [00:16:30] So extend your investment success with Vanguard to your superannuation head to vanguard.com.au/super to explore Vanguard Super. 

Alec: [00:16:40] Fee comparison based on super writing smart data as at 31st March 2024. Other fees and costs may apply. Vanguard Super PTY LTD is the trustee of Vanguard Super, read the relevant PDFs and T&D available at vanguard.com/super and consider if a product is right for you before making any financial decisions. 

Bryce: [00:17:04] Welcome back to Equity Mates and our series on superannuation supported by Vanguard. Ren, we've spoken about why superannuation is a super tool, why it is the only free kick in your finances. But this is the interesting part. We're going to have a chat now about why Aussies aren't, or the extent to which Aussies aren't engaged, and you've got some alarming figures. 

Alec: [00:17:27] To be honest, I thought the first half was interesting, but I'll take that feedback on this. 

Bryce: [00:17:32] It is interesting that I guess this is the part that really brings to light. The work that needs to be done to get everyone up and about when it comes to super.

Alec: [00:17:42] Yeah, because I think, you know, as we're talking about that, those free kicks, like for people like us who do a finance podcast and think about it for a living, like we're very well aware of the benefits of super and the reason it's so important. And I'm sure a lot of people listening, especially for equity markets that have been listening for a while, they would also be very well aware. And, you know, super is probably well set up. But this is our call for those that have got it set up. Engage a mate. As much as you don't want to bring up super at a barbecue or at the pub, too many Aussies are missing out. They're not engaged and the stats are alarming. 

Bryce: [00:18:24] I would even say the stats show that there's a large portion of the equity mates community that fall into this bucket. So let's go through some.

Alec: [00:18:32] So these numbers come from Vanguard's study. 1 in 2 working age Australians have either not made contact with this super fund in the last 12 months, or never made contact at all. Now I made contact here. The definition of it, includes any form of engagement include, you know, like so it could be a phone call or an email. But more importantly, accessing the super funds website includes it.

Bryce: [00:18:57] That's contact. Actively thinking about and going, oh, I should have a look at Vanguard Super. 

Alec: [00:19:03] So yeah. So 1 in 2 working age Aussies. yeah yeah yeah. Yeah. So like that is the extent of that.com income. Yeah. But that's not the only stock. Yeah. 1 in 4. Don't know what their super balance is. Yeah. What's your super balance?

Bryce: [00:19:22] I could tell you. But for the purposes of I know what it is. It's for me. It is something that I check not as regularly as my portfolio, but every quarter. I'm looking at it. 

Alec: [00:19:37] Nice. I check it daily first thing what I like. No, I check it. I check it quite regularly. Oh, like. Yeah, probably more than once a quarter. 

Bryce: [00:19:48] I feel it's something, it's a balance that you will check more and more as you get older and older. Definitely. Like I know my uncle when he got to. He'll often talk about how he's checking the stock balance up and down, up and down. Like, I don't want to pay at that point. 

Alec: [00:20:02] Yeah, yeah, yeah, yeah. But that's not the only stat. This is one that is close to our heart. We have a policy here at Equity Mates that we hate fees. And when it comes to super, as I was saying earlier, we those worked examples, those seemingly small differences in fees compounded over a long period of time make a massive difference. How does this start? Half of Australians don't know what they pay an annual fees in super. 

Bryce: [00:20:28] Wow. So you've got half who don't even check or engage with this super fund in any way. 

Alec: [00:20:33] To be honest, it's probably the same half but don't know what they've paid. 

Bryce: [00:20:36] There's another 50%. Also don't know what they're paying in phase, which I think is the most crucial thing to understand. And then a quarter of us don't know ours super balance. I think interestingly, as part of that as well, like the fourth one that I would add in there is, you should also know what your, what your super fund is invested in. And I think by looking at your fees and looking at your balance, you're likely to start going down the rabbit hole of what am I actually in? Yeah, yeah, yeah. So. 

Alec: [00:21:07] At the very least, even if it's not like you don't know the particular assets, at the very least, are you growth conservative. Balance. 

Bryce: [00:21:17] Yeah. Yeah. Like are you actually set up is your and we'll talk about this in the third episode. But are you set in the right type of super fund structure, an investment portfolio for your age. The phrase is a good one because, I went in in my most recent review just to remind myself, and there are a few funny ways that they present fees, administration fees, assets under management. So you definitely need to pay attention. So that finally superannuation is the foundation of your retirement, which is probably the biggest. Why at the end of the day, like it is time to engage with your super because as we said at the top, this is going to dictate the choice, the enjoyment that you have in retirement. 

Alec: [00:21:59] Yeah, I mean, I look if I, if I can get a little bit political and a little a bit cynical here, like the foundation of our grandparents retirement, like those that have retired now. Is the booming Australian property market. Owning their own home, not having their own home count to the pension assets test and the age pension. And then also like that they didn't really grow up in an era where super was a thing, you know, when they came in in the 90s. Our parents are the generation where most of their working lives, they had super, but not all. Like where really, you know, the generation that's probably a little bit younger than our parents would be the first generation to retire fully on super. And there is no doubt this is controversial to say, but there is no doubt in my mind that as future governments get to a world where the people retiring have had a full working life of super, there will be budgetary pressure to change the way that the age pension is managed, to change the way that the asset test looks at things like, the fully owned home. Changes will come. The population pyramid doesn't support the current level of government support for retirees. By the time they retire it's going to be a lot more. You're what you built over your working life is the foundation of your retirement. And that means your super is the foundation of it. And then you build on it with, you know, maybe you own a house that you've paid off. Maybe you've got investments outside of super. But like in my mind and like, this is my personal view, there's going to be more of a level of self-reliance expected when we retire than those who have currently retired. And I think whether I am right or wrong, we need to think about super as the foundation of our retirement rather than any other thing that may exist. 

Bryce: [00:24:01] I don't disagree with that. Yeah, I think I think we're going to have some pretty healthy super balances, particularly if you start paying attention to it. 

Alec: [00:24:08] Yeah, definitely.

Bryce: [00:24:09] And it'll be a major carrot being dangled in front of the government to say everyone's sitting on some pretty decent sized piles of cash. 

Alec: [00:24:19] And I want to be really clear. I don't think that's a bad thing. In many ways, I actually think that's a good thing. The challenge for the government and for super funds, and I mean for finance podcasters, is to get people engaged in this super now, because its importance is only going to grow over the coming decades. And that's the message that we really need to get across. Super is the foundation of our retirements. Our great grandparents and our grandparents had a defined benefits system. They got paid pensions by their companies and then by the government. We are moving to a world of defined contributions where when you're working, you put money here in Australia and your super fund in America in your 401 K in the UK in your lifetime ISA, New Zealand has one which I forgot the name of, but the my point is, governments of Western governments around the world are all moving in the same direction, and that is to find contributions, build a nest egg and then that is your foundation for retirement. 

Bryce: [00:25:21] Yeah. Love it. Well, the final stat to close out from Vanguard's study. And it's a good news story Ren, we overestimate what we think we're going to need in retirement. The Vanguard study shows that 50% of working age Australians want to retire with a yearly income significantly higher than the yearly income that is actually required by older generations. Now, keeping in mind, I assume this takes into consideration that you own your own home. You're not paying down debt and those sorts of things. 

Alec: [00:25:48] This also takes into account inflation and inflation. Yeah. So because obviously we're going to need to spend more than current retirees. That they've adjusted for inflation in this study.

Bryce: [00:25:59] So the study shows that we would like to have $99,000 per year. 

Alec: [00:26:05] In today's dollars. 

Bryce: [00:26:06] In today's dollars to retire, where in reality, only $68,000 per year is required. 

Alec: [00:26:13] For the average. 

Bryce: [00:26:14] For the average retiree. Now you can look up, and we've spoken about it on the show before. You can look up what people define as comfortable retirement and how much you need to retire comfortably. And yes, the good news is these figures are not out of reach. 

Alec: [00:26:29] It's one of the most common questions we get at equity mates. And to be honest, it is the most common question I have when I'm thinking about my super, I kind of want a big shiny number that I can just chase. So there is another way to think about the end goal. And like, we all would love a big shiny number that we can just put up in lights and chase and say, that's what we need to achieve. But it's hard to know. It's hard to know what the value of money will be because of inflation. When we retire, it's hard to know who we will be when we retire, what our family situations will be. So it can be often hard to say this is the Shining on bay to chase. So another way to think about it is. Your replacement rate. And retirement plan is sort of talk about, getting to a point where you're generating income from your investments that is equal to between 66 and 80% of your retirement income. So for ease of maths, let's say you're earning $100,000 a year in income. You want to get to, you know, earning sort of $80,000 a year in income. That's 80% of 100,000. And so that can be another way to think about it. How much income, can my portfolio and my superannuation, the investments that are in super now. But then I'll pull out of super when I retire. How much income can that generate and what does that look like relative to my current salary? And you sort of aim for between 66 and 80%. And once you've got there you can say, all right, well I'm feeling like I'm pretty retirement ready. 

Bryce: [00:27:58] Yeah. So that's a, that's instead of chasing that hard I'm going to get to a million bucks. I'd figure.

Alec: [00:28:05] Those two numbers can correlate because in retirement planning there's a 4% rule. And you sort of say that you can safely draw down 4% of your nest egg here, and you won't run out of money over a 30 year period. And so you could sort of say, well, if $80,000 is my 4%, then 80,000 times 25 gets me to 100%, 80,000 times 25 is, 160,000 times five is. 

Bryce: [00:28:36] 2 million. 

Alec: [00:28:38] Oh, that was actually so easy. 4% of a million is 40,000. Yeah. Okay. So, yeah, $2 million is what you're chasing. Yeah. So then you've got to be number one. It's again, it's all related, however you want to think about it. And 2 million can feel out of reach that go to the money smart superannuation calculator and put the numbers in. And you start to say that if you give yourself 30 or 40 years, it's a lot more achievable than you probably think. 

Bryce: [00:29:05] Yeah, well, especially we are contributing 11% of your income every single time you paid, like you are literally dollar cost averaging for 40 years, whether you like it or not. So pay attention to what you're doing. Get on the right side of the numbers. Get on the right side of the stats. I should say. Really think about the fact and the tax advantages, the fact that superannuation is a free kick. And as we said, if there's anything you do this year, if you don't feel like you know enough to engage in investing outside of superannuation, or that all your money is tied up in paying off your mortgage and cost of living, that is completely fine, because you can still make meaningful change in your superannuation fund right now by jumping on the website and having a look at what you're invested in. Have a look at your fees. Understand more than just you putting money into a default super fund that your employer has chosen for you. So yeah, pay attention. 

Alec: [00:29:58] So while you're doing that big wrap up spiel, I just put it into the compound interest calculator. $122 a week, which is what we said a median earnings 1300 a week, 11% of that less 15% tax 122. 122 a week for 40 years at 8 percent, 1.85 million. 

Bryce: [00:30:18] There you go. 

Alec: [00:30:19] So, you know, it's achievable. 

Bryce: [00:30:21] It is absolutely.

Alec: [00:30:22] True. And, you know, if you're thinking I will have I left it to like, you know, like the good answer is no because the free kick is still available to you. And you can choose the free kick by doing additional contributions. It's not as far out of reach as you think it is. And that's what really we're going to be covering in the next two episodes of this superannuation week here on equity mates. 

Bryce: [00:30:42] But before we go, we want to say a huge thank you to Vanguard Super for supporting this series. Backed by 45 years of global investment expertise. Vanguard super offers Australians a simpler, smarter option when it comes to their financial future. 

Alec: [00:30:56] Whether you're just starting your career or planning your retirement, Vanguard has you covered. Head to vanguard.com.au/super to explore Vanguard Super. 

Bryce: [00:31:06] Vanguard Super Pty Ltd is the trustee of Vanguard Super. Read the relevant PDS and T&D available at Vanguard.com.au/super and consider if a product is right for you before making any financial decisions.