Having a superannuation account with $2 million sitting in it is a prospect that many Australians would find both equally tantalising and sobering.
Tantalising because $2 million in super is enough to fund not just a comfortable retirement, but a lavish one. It would imply that one could enjoy an annual income of at least $80,000 (using the 4% rule) without even drawing down on the principal of that $2 million balance.
But it is also sobering because, as we've discussed many times here at the Motley Fool, most Australians' current superannuation balances are not nearly adequate to get them to $2 million before they hit the age of 67. As we discussed just last month, the average superannuation balance for someone aged between 70 and 74 in Australia was recently pinpointed at just $481,483.
But even if you're on a salary that is decidedly not in the 1% of income earners in Australia, I think getting to a superannuation balance of $2 million is possible for many of us. Here's how I would plan it.
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How to hit $2 million in your superannuation fund
I would start by making sure your superannuation contributions are being invested in the most efficient manner possible. Most super funds put your cash into what's known as a 'balanced' fund. It is called that because it balances the aim for maximising returns with the desire of many Australians to minimise volatility in their super funds.
Your fund walks this tightrope by investing your money into a range of different asset classes, all with different historical rates of return and levels of volatility. There are ASX and international shares to maximise portfolio growth. But there are also bonds and cash investments that trade lower long-term returns for volatility protection.
Not all things should be balanced
This might be good for your peace of mind, but it can be deleterious to your retirement.
We don't need to access our super until we've reached retirement age. So if you're in your 20s, 30s, or 40s, you should arguably be prioritising portfolio returns over reducing volatility. Opting for a shares-only 'growth' option in your super fund can, therefore, make a big difference to one's final superannuation balance.
AustralianSuper tells us that their 'Balanced' option has returned an average of 8.16% per annum over the ten years to 30 June 2023. But their share-based 'High Growth' portfolio has achieved a 9.62% return.
That might not seem like much, but it would make a huge difference over decades. Let's say someone started off investing $400 into a super fund every month (for argument's sake, we'll disregard the superannuation guarantee) and got a return of 8.16%. After 40 years, they would have a balance of approximately $1.31 million (not taking into account fees and taxes).
But if they instead achieved that higher return of 9.62% per annum, they would instead have $1.93 million to their name.
There's no guarantee that those rates of return will be consistent going forward. However, I think most Australians under 50 should opt for a higher-growth option for their super. It is arguably an essential step if you ever wish to get to a $2 million retirement fund over your career.
A little extra superannuation goes a long way
Another way you can potentially boost your super fund to hit $2 million is by making extra superannuation contributions. The Australian Taxation Office (ATO) allows most Australians to make both before- and after-tax super top-ups, which can be a very tax-efficient way to build wealth.
So, let's say our investor from earlier increases their super contributions from $400 a month to $500. Instead of ending up with $1.93 million after 40 years, they would have a nest egg worth $2.31 million.
Of course, finding extra cash to put into super is a tough ask for many, given the current cost-of-living crisis. But we can't ignore the fact that this is probably going to be essential if you want to boost your super fund to $2 million.
Foolish takeaway
Everyone's financial circumstances are different. As such, it is essential you speak to a financial adviser or tax expert before you start fiddling with your superannuation or making extra contributions. You don't want to end up paying extra taxes in the pursuit of a $2 million super fund.
However, I think most people have a shot at this pot of gold if they prioritise building up their super funds and ensuring they are getting the best return for their buck.
