Superannuation is a key part of retirement wealth building for most Aussies because of its tax advantages and the amount of money we regularly invest in it.
Many people receive mandatory superannuation contributions from their employer as a percentage of their wages. However, if they want to and have room in their budget, they can choose to contribute more to their superannuation fund to boost their long-term wealth building.
What size nest egg do we need for a comfortable retirement?
The Australian Financial Security Authority (AFSA) Retirement Standard says the superannuation balance required for a comfortable retirement at 67 is $690,000 for a couple and $595,000 for a single person.
According to recent reporting by the ABC, Australians should have a superannuation balance of about $156,000 by the age of 40 to reach a comfortable retirement. However, the average male aged 40-44 has a balance of $139,431, and the average female aged 40-44 has $107,538.
What to do?
There are two main things we can do to help improve the superannuation balances over the long term.
First, history tells us that shares have the potential to deliver stronger returns than term deposits in a bank, for example, because companies can expand operations and compound their earnings. So, over decades, there's a good chance (but it's not guaranteed) that shares can grow wealth.
Secondly, we can contribute extra money to superannuation, and the sooner we start, the better.
How adding extra money to superannuation can make a big difference
According to Australian Tax Office data, the average account balance for someone aged between 18-24 in FY21 was $7,740.
Everyone's earnings are different, and wages can vary significantly over one's lifetime, so I'll give very broad examples of what we could see by adding more.
I'm not going to try to account for the inflation of people's wages or the growth of what superannuation balance may be required in the future. Play around with a compound calculator and see what balance you can reach.
As a minimum, let's take that $7,740 starting balance and see what happens if $450 is the monthly contribution into the superannuation fund and it returns an average of 8% per annum.
The balance would grow to $2.03 million over 43 years (for a 24-year-old to reach 67). That's not adding any more than $450 per month the whole time, which I'd suggest is what someone may achieve if they work full-time but don't add anything extra to their fund.
Tax is also a factor to consider, but I'd say I have used conservative contribution and investment return figures to roughly compensate.
Let's bump that monthly contribution amount to $750 per month. After 43 years, it could grow to $3.18 million if it returned 8% per annum.
Increasing that contribution to $1,000 per month would take the ending balance to $4.17 million.
If the superannuation fund received $1,500 per month, we're talking about a nest egg worth more than $6 million after 43 years!
Foolish takeaway
I firmly believe that ASX shares can help grow wealth over the long term.
Mandatory contributions and investments in growth assets alone should help people reach a pleasing amount of money in retirement, but I've shown how adding more money could make a big difference — it could add millions to the superannuation balance by the time we retire.
