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Superannuation: Australia’s Elephant in the Room

I happen to think Elephants are super cute; I am not particularly fond of the kind of Elephant that hangs around unannounced and uninvited though. I especially dislike Elephants that are intentionally ignored by those around them (please acknowledge your Elephants people! They take up too much space!).

For those of you who don’t know what Superannuation is, here’s a basic run-down.

Source: YouTube “AustralianSuper”

Source: YouTube “Financial Spectrum – Financial Planners Sydney

I have to admit, I only really started looking into my own Superannuation Elephant a couple of years ago; I really didn’t like what I saw. I have only been working Full-Time for 4 years and have only been putting away the minimum mandatory amount of 9.5% that my employer pays into my account. My current Superannuation amount stands below $30,000. Basically, if I continue along my merry way ignoring my Super Elephant, I can expect to retire with only 54% of the projected amount I would need to live a comfortable retirement.

For me, that is unacceptable. Would that be acceptable for you?

But what can I do about it? Quite a bit, actually! Let’s get stuck in!

Now that we have a basic understanding of what Superannuation is, let’s explore a little further. The first thing you should do is log in to your Super (through your chosen fund) and find out exactly what’s in it.

Here is a snapshot of my current Super balance. Considering I am 31 years old, the total amount of money in my Super is pretty shit. It’s not completely terrible though, as having any amount of money in your Super now means that it has 30+ years left of growth to accumulate over time. As you can also see, I have a projected Super balance of $253,000 by 2055, which would work out to be around half of what I would need to retire on.

Next, what you want to look at is what your Super fund is actually investing your money in. This is important because depending on how you and your Super fund choose to invest your money will determine approximately what kind of return (by return, I mean what you can expect to get back after you’ve invested your money) you would be looking at receiving. To go over this briefly, check out the below video.

Source: YouTube “Rask Australia”

Below is a table of how my current Superannuation fund invests my money.

WOW! I did not expect to see this!

I was expecting something like 60 – 75% Growth and 25 – 40% Defensive investment, not 98% Growth and 2% Defensive! This is actually an extremely aggressive investment strategy, not very diversified, and has a much higher risk rate than other investment strategies and would also generally attract higher account fees. This simply won’t do for me! Time to give them a boot and switch to another Super fund!

There are many things you should consider when choosing a new Superannuation fund. First thing is to check with your currently employer whether they have a default fund available for their employees. Oftentimes, employers will have an agreement with a Super fund to sign up their employees in return for lower fees (although this is not always the case). You should also check whether your employer supports choice of fund, where you are allowed to choose your own Superannuation fund or whether you are required to use a specific fund depending on your area of employment (such as a specific trade or sector of industry). Second thing to do is have a look at how the Super fund has performed or behaved in the past. It’s important to note that just because a Super fund has performed well in the past, doesn’t mean it will continue to do so in the future, so keep that in mind. What you want to look for is a trend of relatively stable growth, ability to diversify investment (and thus reduce investment risk), fees involved in holding an account with said fund, and any insurance products you may or may not require. Not all funds have default insurance so it’s a good thing to check before you sign up what kind of insurance cover you may need (in terms of Death Benefit, Total and Permanent Disability Benefit (TPD), and Income Protection). You may also decide, as I have, that you don’t actually need any kind of insurance. Fortunately for me, my employer has taken out a Life and TPD insurance plan on my behalf, therefore I do not personally need to take out my own insurance if I don’t want to (although I can and would be eligible for both to be paid out). Choosing to opt-out of insurance cover through your Superannuation is a great way to save on fees eating away at your nest egg!

Thinking it’s all too hard to compare Super funds? You’re not alone. That is why there are websites out there that can compare Super funds for you and you can choose one that would suit your own personal needs. Here’s some examples below.

https://www.canstar.com.au/superannuation/?age=30+-+39&super_balance=%240+-+%2455k&profile=30s+Balance+1&provider_link=No%2C+show+results+-+with+and+without+links

https://www.ratecity.com.au/superannuation

https://www.finder.com.au/super-funds

Ok, so I have done an absolute shit-ton of Superannuation research and have decided on one that I’m happy to move ahead with. Now what? The next step is to set up an account with the new fund and inform your employer of your new fund (you can download a Choice of Super fund form here to fill out and give to your employer: https://www.ato.gov.au/assets/0/104/2244/2335/35c234b5-6918-4dd0-a3db-95edfd76adc0.pdf )

There are a couple of ways you can consolidate (or move) all of your current Superannuation in the entire universe into one account (highly recommended as you will reduce all fees on all your money). Your new Super fund should have an easy to use online facility in which you can input information from your old super fund so that your new fund can request a transfer of Super balance. You can also access your Australian Taxation Office account through a MyGov account online ( https://my.gov.au/LoginServices/main/login?execution=e1s1 )and do a Super search to see what Super accounts are out there with your name on it, and request that the balance of each of those accounts is rolled over (or moved) into your new account. There are probably other ways to consolidate your Super, but these two are by far the most time-efficient.

So what do the investments in my new Super fund look like? Let’s have a look! Because I have only just set up my new fund, I am yet to have my Super rolled over into it and cannot show you all what it currently looks like. What I can share with you is how my Super balance will be invested once it’s up and running. I have opted for what my Super fund calls “Shares Plus” and is a mixture of growth and defensive investment.

Australian Shares = 30%
International Shares = 30%
Emerging International Markets = 11%
Property = 8%
Infrastructure = 6%
Private Equity = 7%
Credit = 6%
Alternatives = 2%

What I now have is a high-growth, high-risk investment portfolio that is much more diversified than my previous super fund. Because I cannot access my Super for another 35-odd years, I can afford to be more high-risk with my investments than when I get to age 50 and beyond. Now that I have my fund sorted, I want to look at maximising the amount I earn and putting away more into my Superannuation.

Why would I put more money into Superannuation than the standard 9.5%? Here’s a helpful insight.

Source: YouTube “ABC News In-Depth”

Because the current 9.5% rate for compulsory Super contributions is not adequate to currently fund retirement adequately, I am choosing to increase my contribution to an overall 15% by salary-sacrificing a further 5.5% of my pre-tax income. How will I calculate this? See below.

Pre-tax Income = Base wage X hours worked per week X weeks per year
Pre-tax Income = 26.78 X 38 X 52 = $52,917.28.
I need to find my pre-tax income per fortnight.
52,917.28 Divide 26 = $2,035.28
Contribution = 5.5 X 2,035.28 Divide 100 = $111.94
Therefore, my pre-tax income will become:
2,035.28 – 111.94 = $1,923.34 per fortnight.

This means I am going to need to revisit my budget to accommodate for this change in income, which I will revisit each week in coming posts.

If you have any questions feel free to leave a comment and I’ll get back to you ASAP. It’s been fun, but I now have a killer headache and am in desperate need of a nap. Stay tuned for upcoming posts about my journey to FIRE!

Time for Some Calculating!

I’ll just get this out there from the get-go:

Mathematics is not my strong point.

If you do happen to spot anything that seems inaccurate, please let me know in the comments section!

Let’s start with my base wage from my current full-time employment. Currently, I earn $26.78 AUD and work 38 hours per week. I get paid fortnightly, so that makes my gross wages (gross meaning before tax and other salary deductions) $2,035.28. Obviously, I have to pay tax on my earnings, so these need to be deducted before I can find my take home fortnightly pay.

One great tool I use to do this is using an online pay calculator. There are many to choose from, but I choose to use http://www.paycalculator.com.au. This simple tool allows you to input your gross earnings based on your pay cycle, and you can then choose what tax exemptions, offsets, or debts that you are required to pay from your pre-tax income.

It’s surprising when you see your personal finances laid bare!!

As you can see from the image above, my take home pay is shown in weekly, fortnightly, monthly, and annual amounts. We can see that my weekly take home pay is $818.64, fortnightly is $1,637.28, monthly income is $3,546.77, leaving my annual take home income at $43,871.28.

I would like to add that these figures are drawn from my base wage and do not include any penalty rates or bonus payments that I receive as part of my employment.

My tax return from financial year 2018/2019 states that I actually earned $61,598 and paid $14,324 in tax. So it is reasonable to expect and assume that I will actually earn a similar amount for the next financial year.

Alongside the $43,871.28 amount that I will earn this financial year, I have also calculated (to the best of my knowledge) my current outgoing expense amount at $34,297.12. I used the MoneySmart website to get this figure (https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner). It’s an excellent resource for budgeting, I strongly suggest you check it out!

Source: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner

As you can see, I have budgeted for everything I can think of using this website tool; I know exactly where my money is going and how much I will have left over. Currently, it looks like I can only expect to save $8271.16 each year (based on my weekly savings multiplied by 52, as there are 52 weeks in 1 year). However, I think I can pare it back even more than this, so let’s get started!

I realised that I had forgotten to mention my ambulance Victoria annual membership in my budget, so that needs to be added in and adjusted. That currently costs me $48.35 annually. This membership saves me having to pay any out-of-pocket expenses relating to any ambulance ride that I may need (which I have needed to use in the past). The average cost of a single ambulance ride in Victoria currently stands at $1,100, and the cost of an airlifted ambulance can be as high as $26,852!!!! Because this is a service that I have needed to use before I choose to invest in this service and can justify the membership cost.

Another thing that can be tweaked from my budget is how much I spend on groceries per week. I had allocated $150 per week and this was to feed one and a half people (my partner doesn’t eat much). Since I sat down and shared with my partner that I wanted to try out this whole FIRE thing, we have decided to open a joint bank account strictly for food and grocery shopping. We have agreed to contribute $75 each, effectively halving my current grocery spending budget (yay!).

Another area I can save some money is the $50 per week I currently set aside for “treating myself”. This is an idea I took on board after reading “The Barefoot Investor” by Scott Pape ( https://barefootinvestor.com/ ). Mr Pape suggests setting up ‘buckets’, which are essentially just different accounts which hold various amounts of money for various things. For example, I have named my savings account “Smile” as this is where I was placing some savings money to save up for nice things, like a holiday or special treat. I now use this account to place all my leftover money from my weekly budget, any extra money I get paid (such as penalty rates, bonuses, etc.), and is where I send my automated debit for bills to. I send my bills money to this account because it helps me track my everyday expenses account a little better, and allows me to earn interest (albeit a small amount) from my savings account. I still like to see the account named ‘Smile’, as it makes me happy to see that account continue to grow.

Back to “treating myself”; I found that I was mainly using this money to buy food, and would consistently overspend because, let’s face it, I’ve earned it (right?!). I would eat (pun intended) into other budget areas to justify my spending on take away food and drink. At the end of the day though, the only person I was cheating was me. I think it would be more appropriate to whittle this down to once a month treat for a nice date night, just us two Baes. We will discuss and come up with a figure.

As you can also see from my above budget, my partner and I have a mortgage, which we currently owe $349,400.81. We also have an offset facility joined to the mortgage, which has about $17,000 sitting in it. That $17,000 is my partner’s money, as we had an agreement (I insisted) that I would pay off all my outstanding debt before we combined our finances together. I have now paid off all other debt besides the our home loan, so I will also begin contributing money to our offset account.

Our minimum mortgage repayments are currently $1,690.87, however, we choose to pay a flat $2,000 per month ($1,000 each). We are looking to change our repayments from monthly to fortnightly, as there is usually one extra fortnight per year than there are months, so we would end up paying off our home loan quicker. So that would make our repayments $26,000 per year instead of $24,000 per year.

So, with a couple of changes already, I could potentially save $271.61 per week. Now, the tenets of FIRE propose an aim of saving as much of your after tax income as possible, with an aim of living off of 50% of your annual income. With that in mind, looking at my new budget I would be looking at saving 35.16% of my annual income per year (calculated as yearly income minus expenses: $43,871.28 – $28,446.08 = $15,425.20). That’s not bad, considering I earn almost half the average weekly Australian full-time income of $1,634 (https://www.abs.gov.au/ausstats/abs%40.nsf/mediareleasesbyCatalogue/030E8BEF4B0B915ECA2582EA00193B04?OpenDocument).

Even before I sat down to write this blog post I thought the most I could save per year would be around $10,000, and even that seemed too good to be true! So to make a couple of changes to my weekly budget and see that I could actually end up saving around $15,000 seems seriously amazing to me! Add to that the regular penalty rates and bonuses that I receive from my full-time job, and I could potentially save upwards of $20,000 next year (or 45.59% of my annual income)!

Mind = Blown

I can still see some room in my budget for improvement, such as downgrading my mobile phone sim-only plan from $30 per month to $15 with Aldi Mobile. Also, our home internet package is quite expensive at $99 per month, so I’m sure my partner and I can improve on that figure. I will update these in my budget as they happen though.

Now to the FIRE side of things. The idea with FIRE is that you take your annual expenses and multiply them by 25. The figure that you get from this math is the rough figure you are aiming for in the Financial Independence phase of the scheme. Once you get to this amount, you could effectively live off that amount for the next 25 years and not need to work. So following my finances shown above, my Financial Independence Figure (FIF) would work out to be $711,152. Sounds like an absolute truck-load of money, but not as much as I expected to be completely honest. This figure, however, I feel is a little too conservative as when I do reach Financial Independence (FI) I certainly won’t want to continue working for my current employer, and would most likely prefer to work part-time or work on a voluntary basis; I also believe that I would like to start spending a little extra money on travel, experiences, entertainment, etc.. This all would need to be factored into my final FIF. I personally feel that aiming for $40,000 per year, or a FIF of 1 Million would be more appropriate. Keeping in mind that my partner and I will have likely paid off our home loan by this time and would not need to consider that amount within our yearly spending, so $40,000 for one person to spend per year would actually be quite a lot.

I can hear what you’re asking in your head. “How long will it take to reach $711,152, let alone $1,000,000???”. Well, there’s a website for that as well! Another Australian FIRE blogger by the name of “Aussie Fire Bug” (https://www.aussiefirebug.com/) gave a really good website for this. It’s called “Networthify”; see below.

Source: https://networthify.com/calculator/earlyretirement?income=43871.28&initialBalance=0&expenses=28446.08&annualPct=5&withdrawalRate=4
Courtesy of: Aussie Fire Bug https://www.aussiefirebug.com/

This is an excellent tool and it’s really fun to play around with! Let’s see what happens when I put through an annual savings amount of $20,000!

Just adding an extra $5,000 to my yearly savings and I wipe almost 4 years off my FI projection! Personally, I’ve never wanted to save so much in my entire life! Just the thought of saving that extra 4 years off of my working life to do whatever I want to do is literally THE BEST FEELING! Seeing these figures and having the potential to retire at the age of 52 (I’m 31 now) is something I could have only dreamed of before.

I feel like I’m only just scratching the surface of what is possible to achieve and talk about! Good thing I still have potentially another 20-odd years left before I reach FI so that leaves plenty of time for me to blog and get everything I have ever wanted to say about this topic out there!

Thanks for reading, I know this was a really long blog post but I felt it was important to get it all out there. I would also like to take this opportunity to thank the handful of people who have already decided to believe in me and subscribed to receive updates about my blog! I honestly thought it would take me forever to get anyone besides my family to even read this so thank you so much! I really appreciate your faith in me and my journey to FIRE!

Stay tuned for my next blog post; I have no idea what it will be about, but I’m sure it will be magical!

The Background for FireBae

The name ‘FireBae’ comes from a mash-up of a nickname my partner and I call each other (Bae) and the term F.I.R.E., which stands for Financial Independence: Retire Early. *Check out my main page for a brief explanation of FIRE*

I would like to briefly go into why I have decided to even write a blog, why I chose to use WordPress, and why I have chosen to write relating to personal finance.

1) Firstly, I really love writing! However, over the years I have greatly neglected this passion and have wanted to start a blog for a few years now to get myself back into it.
2) I am not a finance guru and do not have any formal background in finance; this is simply a passion project.
3) I wanted to make this as accessible to people as possible, as well as keeping my own costs down (hence the use of WordPress.com).
4) I wanted to be able to show my journey to FIRE in real time and to show that you don’t need to earn a massive wage to get yourself out of debt and into saving for the future.
5) I am hoping to give those people who feel like they struggle with personal finance a window into an opportunity to change their circumstances one step at a time!

I will be beginning my blog “officially” in earnest come January 1 2020. My main personal finance goals for 2020 are to save at least 10,000 from my full-time wage and to begin investing some of that money into shares in the Australia Stock Exchange. My long-term goals over the coming decade (2020 to 2030) are to completely pay off my mortgage and have 100,000 in savings and passive income.

I aim to share with you all my personal finances from beginning to end (and beyond) and be as honest and upfront as possible in terms of how much I earn, where my money goes, how much I spend on what, and how much I am able to save per week. I am hoping to post at the very least once per week for the entirety of my blog. My aim is to share with everyday people what is possible with personal finance and also to an extent hold myself accountable for my personal financial decisions.

So if this sounds interesting and you think it can add value to your life, please subscribe to my blog in order to receive updates straight to your inbox! There is a subscription button built into the main page at the bottom of my blog.

Thanks for reading and I look forward to sharing my journey with you!

Sincerely,FireBae