I regularly have ‘interesting’ (read: frustrating) discussions with a financial planners and advisers about making extra superannuation contributions.

So far, most financial advisers I’ve met recommend extra superannuation contributions in general, to minimise tax and boost retirement income.

In the past, extra contributions have not been for me. I only started making them in my late 30’s. Up till that point, I preferred to have the money in my control, where I can make the most of it now.

If I’d listened to advisers advocating for extra contributions earlier, I would not have reached financial independence at 31.

But if it’s not a one-size-fits-all thing, what should you be aware of when making this decision?

Why making extra super contributions can be good

Here are some of the salient points made by numerous financial planners and advisers during our conversations over the years, most of which I tend to agree with:

1. Reduce your tax, increase your total wealth

Let’s say you earn $1,000 of before-tax income.

If you put it into super, you’ll pay 15 per cent tax (so long as you meet the conditions for concessional contributions). You’re left with $850 in your super fund to be invested on your behalf.

If you take it as after-tax income, you’ll be left with whatever your highest tax bracket gives you. For example, if you earn $60,000 a year, your highest bracket is 30 per cent plus the 2 per cent Medicare levy (at FY25 rates). You’ll be left with $680 in your pocket.

Assuming you invest those totals identically, for example, you purchase the same shares, it’s very plain to see that the former – $850 of investment – is better than $680 of investment.

Given the effect of compounding, any additional superannuation you invest at the beginning of a given time period will have an exponential increase at the finish line. In other words, the 25 per cent more in your super versus your hand today can be worth 100+ per cent more when you’re done (depending on how long you’re investing for).

Earnings on your superannuation are taxed at 15 per cent until you near retirement. This may be less than the tax you pay on earnings on a positively geared investment at your marginal rate, and this also would increase the compounding value.

So, from a purely ‘numbers at retirement’ point of view, extra superannuation contributions are a winner.

Odds are you’ll be old and grey one day, so best to have a plan to support yourself

2. You will need super in your retirement

Around two thirds of retirees in Australia receive the age pension.

Even with rent assistance, it’s less than $600 a week – not far off the Australian poverty line according to ACOSS. That’s not much, and it’s probably not going to increase dramatically. If anything, the pension is likely to reduce relative to living expenses.

You need some form of income outside of the pension to support you. For most people, that will come from superannuation.

3. Take advantage of super management fixed costs

This is particularly true for those with Self-Managed Superannuation Funds (SMSFs). If you’re paying the costs of running your own SMSF, you’ve got some fixed overheads to do so. By putting more cash into super, you’re making the most of those fixed costs.

Why making extra super contributions may not be helpful

There is no question in my mind that the above points are valid and solid reasons to make extra superannuation contributions.

But after running some modelling on my own situation, I’ve found avoid making extra super contributions was the right choice for my circumstances for the following reasons:

1. Financial independence before 60

If you focus your wealth and growth on superannuation, you’ll have a great reservoir of assets to access when you retire… at 60-67 years of age. If you want to access that money for retirement early, you may pay a penalty in the form of additional tax.

At 42 years old, I can support myself on the passive income from investments I made with after-tax income. If I’d prioritised super over those investments, chances are I wouldn’t be financially independence yet. There would be no choice about working – I’d need the income.

So, what’s better for you: having a financial imperative to work now, or being free to choose?

I now realise that my superannuation strategy is a foreign concept to most people, particularly planners and advisers. Their models are based on people working for income in their ‘prime earning years’ – 40’s and 50s – and those models don’t work if your target retirement age is earlier.

The extra tax doesn’t bother me. I think of it as paying a premium for having the freedom to choose.

2. Changing rules

If you are younger than 50, no one can tell you with 100 per cent certainty:

• what the government definition of retirement age will be when you retire, or

• whether any additional taxes will be imposed on your super retrospectively.

Once the after-tax income is in your hand, it’s yours.

Sure, there may be changes to capital gains tax and negative gearing rules – but if you hold on to your assets, you’re only taxed on the yield. If you have a positively geared property, you’re getting an income that replaces your need to work.

A sound investment strategy with your after-tax dollars can mean any changes to super rules – which are in the hands of our government – do not change your retirement plans and income.

3. Fees

Superannuation fees are a killer.

They are literally eating away your growth. For example, if your fund charges 2.5 per cent fees and you only make 5 per cent a year return (which is conceivable for the next ten years), you lose half of your growth.

Remember the exponential impact effect? That 2.5 per cent will do much more than halve your final balance over 30 years. It’s a higher rate than income tax in that scenario.

Of course, if you hand over your after-tax money to someone else to invest for you, you’ll be paying a fee there too. Fee reduction is only an advantage if you manage your investments yourself. Also, there are now some great direct-investment superannuation options offered by major funds that have fees as low as 0.1 per cent. That’s hard to beat.

Bringing it all together

The decision whether to make additional super contributions illustrates this perfectly:

There are only three rules for financial independence: Save, buy assets, and avoid bad debt. Everything else is about what you want to do.

You need to decide what you want, and act accordingly. Having all the money in the world in your superannuation account is useless if it doesn’t fit with your plans.

You may be in a completely different circumstance to me. Maybe:

• you’re close to retirement, so taking advantage of the reduced tax is a no-brainer.

• you just know that you’ll spend any extra money you have rather than save and invest it, regardless of your good intentions.

• you don’t feel confident investing yourself and so you’d rather rely on a super fund manager (in which case, have I got the course for you!)

When it comes to planning for retirement and deciding on extra super contributions – it’s 100 per cent about priorities and what you want.

So, make an informed choice!

Do you make extra superannuation payments? If so, what helped you make the decision. Let me know in the comments below.

Author’s note: this article was originally published on the Money School blog in June 2016 and has been refreshed in August 2024.

We’re slowly migrating the blog across to Beehiiv, which means we’re losing the comments on the original Wordpress blog.

Sorry to those who asked questions or made comments, you’re welcome to re-add them here.

About Money School

If you’re new here, welcome! Delighted to have you 😁

This is the blog for Money School, an Australian financial education company.

The main site is at https://www.moneyschool.org.au, but I keep our articles over here on beehiiv.

Everything on the main site and this blog is for educational purposes only. I’m not a financial adviser, nor do I play one on Netflix. I aim to help you learn about money so you can ‘choose your own adventure’.

Money School was co-founded in 2010 by me (Lacey Filipich) and my mother, Fran White. Money School offers workshops, online courses and has an international award-winning book, published with Penguin Life in 2020.

I’m also a regular media commentator on all things personal finance. If you’ve got 16 minutes to spare, you might like to check out my TEDx talk (over 1m views!) on financial independence and mini-retirements.