Superannuation remains the most tax-effective way for most Australians to build investment wealth for retirement, even with recent and proposed changes to super rules. Once you reach pension phase, the earnings within your super account are taxed at 0%, which means every dollar you’ve saved works harder to support your retirement lifestyle.

Currently, the maximum amount you can transfer into the tax-free pension phase is $2 million (subject to indexation with inflation). At this level, you could draw a tax-free income of about $100,000 per year (using a 5% drawdown rate) and without the need to sell investments.

So, if you have the ability to build your super up to $2 million before retirement, shouldn’t it be a key goal?

Why start early

Caps on contributions mean you can’t put unlimited amounts into super at once. That’s why planning early matters. The sooner you start, the more flexibility you have to take advantage of the rules and maximise your position in the most tax-effective way.

Annual contribution caps operate on a “use it or lose it” basis unless you qualify for carry-forward rules, and even then, only up to five years’ worth can be carried forward.

Your timeline to $2 million

The path to $2 million requires being actively engaged with your super and regularly saving from early on to set the foundations and make the most of the caps.

In your 20s and 30s – Focus on the basics

  • Consolidate your super into a single account to avoid unnecessary fees.
  • Learn about your investment options and align them with your age and risk profile.
  • If you’re employed, check your employer contributions are flowing in correctly.
  • If you’re self-employed, aim to contribute at least 12% of your income.

 In your 40s – This is the time to accelerate

  • If your cashflow allows, maximise your concessional contributions (currently up to $30,000 p.a.) by ‘topping up’ any contributions received from your employer and claiming a tax deduction for personal contributions (or arrange a salary sacrifice).
  • By doing so, you’re not only reducing your taxable income but also giving your super balance a significant boost as every extra dollar you add now benefits from 20-plus years of growth.

In your 50s and 60s – Retirement is on the horizon

  • Make super a priority to plan for your retirement lifestyle goals.
  • Consider your future living costs in retirement – how much will you need to live on?
  • If you have neglected your super until now, make use of carry-forward concessional contributions (if eligible) or non-concessional contributions (up to $120,000 p.a.) to boost your balance.

The power of compounding in action

Compounding is powerful because the earlier you contribute, the more time your money has to grow. Every dollar invested today earns returns, and those returns earn more returns over time.

Waiting until the last decade before retirement often means playing catch-up with large lump sums, which can be harder to manage, and it is usually not as tax effective.

For example, consider Jane:

In her 30s, she receives the minimum 12% super guarantee contributions based on a $90,000 salary (we assume this is increasing with inflation at an average of 2% p.a.). She chooses a growth investment option with an estimated average real return of 5% p.a.

In her 40s, she maximises concessional contributions to $30,000 p.a. by topping up amounts made by her employer.

By age 50, her balance could reach $775,000 and by age 65 she could retire with $1.89 million (enough to fund a retirement income of $90,000 p.a.)

If she contributes an extra $15,000 p.a. in non-concessional amount from age 55-65, she could reach $2.09 million at age 65 (supporting a $100,000 p.a. annual retirement income)

In this scenario, $150,000 in additional contributions results in approximately $50,000 extra net earnings and an extra $200,000 in super.

The lesson is clear: small, consistent contributions over time are far more effective because compounding magnifies every extra contribution – the sooner it goes in, the more it grows.

Planning ahead

While $2 million in super may seem out of reach, with a clear strategy and the mandated 12% Super Guarantee, it’s more achievable than you might think. The key is to start early, make the most of your contribution caps, and maximise the benefits of compounding returns.

What’s next for you

Superannuation caps and rules change regularly, and everyone’s situation is different.

We can help you navigate these complexities with clear, proactive advice. For tailored advice and to ensure you’re making the most of the opportunities available, please reach out to one of our team.

Prue Cheeseman-Goodes is an adviser of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052). This content contains general advice which does not consider your particular circumstances. You should seek advice from HLB Mann Judd Wealth Management (NSW) who can consider if the strategies and products are right for you. Information based on historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions