YOUR superannuation statement is due in the mail imminently but if you’re like most people, chances are you barely give it a second thought.
That decision could cost you hundreds of thousands of dollars on retirement.
Here are five tips to put you on the right track:
Fees have the potential to significantly erode your nest egg. If you’re 30, on $72,800 a year and pay two per cent a year in fees, you’ll be about $400,000 worse off at retirement versus someone who pays one per cent in fees.
That’s the equivalent of a boat – or 20 first-class trips around the world. Superannuation funds in Australia generally charge too much in fees – $19 billion in 2014, to be precise. If you’re in a fund that charges more than 1.5 per cent there’s good evidence to show that your net returns (returns minus fees) are likely to be lower than someone who pays one per cent or less in fees.
Some super statements are ambiguous and you may need to visit the fund’s website to find out what fees you are actually paying. Don’t forget to include ‘adviser fees’ in your fee calculation. If you’re young and the only advice you have received is to invest in a ‘growth’ fund because you’re far from retirement you’re probably paying an adviser for very little value-add.
2) INVESTMENT MIX
For anyone young with more than 30 years until retirement, your investment mix should be focused on assets that have averaged higher long-term returns (typically shares and property, which are riskier than cash and bonds but provide higher long-term returns). So if you have a long-term horizon you can ride out short-term movements to harvest these higher returns.
As a rule of thumb, someone with a long investment horizon can have at least 70 to 80 per cent of their portfolio in high-growth assets like shares and direct property with the balance invested in lower risk assets like infrastructure, fixed interest, private equity and cash. Super funds with this type of investment mix are typically called ‘growth’, ‘high growth’ or ‘aggressive growth’ funds.
As you approach retirement the amount of your portfolio exposed to growth assets like shares and property is likely to decrease in line with your increased reliance on stability and income. Medium-risk funds are often called ‘diversified’ or ‘balanced’, and low-risk funds you may see being called ‘stable’ or ‘conservative’ or ‘capital guaranteed’.
ASIC’s super calculator can help you find the right investment mix. Some super funds also offer calculators but be aware they may not be completely honest about fees and are often designed to funnel you into their super funds.
Many super funds offer insurance cover for their members: death cover, total and permanent disability cover (TPD) and income protection cover (IP). You may choose to increase, decrease, or cancel your default insurance cover. To pay for insurance, premiums are deducted from your super account balance as opposed to you getting a bill.
Purchasing insurance through your super can be cheaper than buying it outside of super. Cover is usually limited and if you move from one fund to another your cover may end without notice. Also, if you have more than one super fund you may be paying for insurance twice unnecessarily.
4) TRACK RECORD
Many super funds have been bragging about their 12 to 15 per cent returns over the past year. Don’t get too excited about that because the market returned the same amount and most of these returns just came from the asset classes they invested in rather than skill.
It is very hard for super fund managers to beat the market return over the long term. Make sure you are looking at after-fee returns over five to 10 years when weighing up your super fund’s track record. In February, APRA released the returns for every super fund in Australia over the last 10 years.
Only two of the top 50 performing funds were retail (for-profit) super funds, which typically charge higher fees than corporate or industry funds.
Check the contributions from your employer are correct. From July 2014, the Superannuation Guarantee rate increased to 9.5 per cent (from 9.25 per cent). Next, using the ASIC calculator you can determine whether you will be able to retire on your desired level or income, or whether you need to supplement your super with additional contributions where you can.
Other options exist to boost your super including salary sacrifice and concessional or non-concessional contributions. But you may prefer to invest excess cash away from your super fund so you are not locking your savings up until retirement. Investing in a property or a low-fee investment portfolio are options.