Eleanor is a financial adviser with three young adult daughters. Her daughters love their sport and are very popular. Most of the local netball club have sat at Eleanor’s kitchen table over the years. Ashleigh is one of them. She plays wing attack in Eleanor’s eldest daughter’s premiership winning team.
Ashleigh is 22, loves kids and she is about to start full time as a primary school teacher. She has worked part time as a waitress for the past four years, earning somewhere between $15,000 and $20,000 in a good year. She has been living with her folks and they love having their only child around. Her parents are going OK financially, and are looking forward to another ten years at least in the workforce.
The starting salary for a primary school teacher is around $60,000 a year. Ashleigh has never seen money like this, and asks Eleanor if they can have a chat about the best thing that she can do.
Eleanor is impressed and keen to help. And as a woman who has raised her own family, she is well-qualified to do so. One of the things of which Eleanor is aware is that the average female super fund balance is just over $40,000 (source: Australian Super Women and Super). The average bloke has just over $70,000. The average retirement payout for women is $112,000 whereas for men it is $198,000. The difference is $86,000.
Eleanor knows that Ashleigh has not yet ‘habituated’ to her much-increased salary. This means that Ashleigh is going to feel very rich this year – her expenses will be much less than her earnings. Eleanor also understands that young women newly-graduated tend to spend everything that they get in the first few years, before they (hopefully) settle down and start saving.
Taken together, these two things mean that, in this first year or two of her working life, salary sacrificing into super looms as a great first step. Ashleigh probably won’t miss any amount she sacrifices. She will still be thinking she is ridiculously wealthy now that she does not have to wait on tables on weekends. “I even get paid when I am on holidays!
So, Eleanor convinces Ashleigh to organise for an extra $10,000 to be sacrificed into super. Given her tax rate, Ashleigh only gives up $7,000 in spending power. But she gains an extra $8,500 after-tax in her super fund. Eleanor reckons that Ashleigh will stick to this plan for the first two years, before she decides she wants to get her hands on more day-to-day spending money. This gives her the chance to accrue an extra $17,000 in super.
According to the ASIC compound interest calculator, if this $17,000 earns the standard target earning rate of 3.5% plus inflation, then by the time 22 year old Ashleigh retires (at age 67), she will have an extra $82,000 in super. If Ashleigh’s life from this point forward follows an average trajectory, then these two years of extra contributions, when Ashleigh saved money she did not miss anyway, will have closed the retirement savings gap for good.
By the age of 24, Ashleigh has managed to be superannuated like a man.