I’ve recently been on a personal finance binge and was recommended Scott Pape’s The Barefoot Investor book from many people. I bought it two weeks ago and have just finished it. I highly recommend it to anyone wanting to take control of your finances and achieve financial freedom. This should be everyone! In particular, I loved the advice on Australian Super funds which can see like a minefield of confusion.
I’d always thought I was on top of my super. I’d consolidated all my superannuation accounts into one. I chose one considered to be low fee, updated my information and checked my bi-monthly statements each time I received them. Each month I’d make sure my superannuation was paid within my payslip and if I moved, I’d update my address.
After reading the Barefoot Investor, I realised that there was more I could do and set out to learn as much as I could from his book and my own research. Scott Pape points out that we work 15 hours a month to earn our 9.5% super so we should be dedicating a small amount of effort into making sure we’re in the right super fund and I couldn’t agree more!
I wanted to not only learn how to make my super work better for me, but to compile information for others to help arm you with more knowledge about your superannuation so you can make the right decisions for your future.
GIVE YOUR SUPERANNUATION FUND A QUICK TUNE UP
Here is a list of five things you can do right now to give your superannuation fund a quick tune up.
1. Set up an online account for your super.
If you don’t already have one, set up an online account for your superannuation. Save your password and log in details somewhere safe so you can access your account at any time. Request emailed statements and keep these in your email inbox (I try to go paper free as much as possible, if that isn’t your thing feel free to print them out). Label them as Superannuation in your gmail for easy access or if you print them, file them in your superannuation folder for easy access.
2. Download your Super fund’s mobile app.
This will allow you to easily login to check how your investments are performing and what your superannuation balance is.
3. Consolidate your super accounts.
Did you change employers and join your new employers preferred super fund? If you haven’t consolidated your old superannuation accounts you could be paying fess of $400 or more annually on each account and losing out on growth in your retirement savings. Don’t let dormant super accounts steal your retirement nest egg. You can find your lost super through MyGov, or you can contact your current superannuation fund and request they consolidate your super on your behalf. Alternatively find more options for finding lost super through Superguide.
4. Check your insurance cover.
When choosing a super fund you should opt in to the Death and Total & Permanent Disablement insurance. These will protect you and your loved ones by paying out a lump sum in the event of death or disablement. There is also an option to get Income Protection Insurance which will pay you a percentage of your wage (up to 75%), usually after a waiting period of 90 days in the event that you can’t work due to sickness or injury. The fees for this will come out of your super fund so you don’t have to pay them from your own after tax wages.
5. Update your beneficiaries.
If something happens to you who do you want your super going to? Best to make this decision well before it becomes an issue. You should update this with life changes such as a marriage,
relationship breakdown, after having children and so on.
NB: If you are considering changing your superannuation fund, hold off on these steps until you have decided whether to stay with your current fund or change to a new one to save you redoing them!
REVIEW YOUR SUPERANNUATION FEES
Check your super fees by downloading your super funds Product Disclosure Statement (PDS). This should be found with a quick online search of “Your super fund PDS”.
These are a summary of the types of fees you are likely to be charged on your superannuation account:
Administration fee: This is a weekly admin fee covering the general running of your superannuation account. This can cost around $5 per month, approximately $60 or more a year.
Asset-based Administration Fee: The asset based administration fee is a fee in addition to the admin fee that will be charged as a % of your total superannuation balance. These differ depending on the fund that you are in. The higher the balance in your super fund the higher your fee. An asset fee of 0.15% on a $50000 investment amounts to $75 a year.
Investment Fee: This is the fee for your investment allocation and is also charged as a percentage of your superannuation balance. These fees can range quite significantly. On a $50000 superannuation balance a fee of 0.02% would cost $10 a year versus a fee of 0.64% at $320 per year. This is where the bulk of your superannuation fees come from so is the most important one to review and compare.
Switching Fees: Some superannuation funds charge this fee when switching your investment choice this can be around $25 per change. Others don’t charge a fee for switching investment choices which is ideal so you are fee to change your investment choice, fee free as it suits you.
Exit fees: Some superannuation funds charge and exit fee to leave them such as a $36 fee.
Compare your superannuation funds fees to others and see how they compare. High fees can eat up a significant portion of your investment over a period of decades.
Check out the Super Guide’s Top 10 Cheapest Australian Super Funds from Feb 2017 for some comparison on Superannuation costs across some of the cheaper Australian Funds.
Once you have reviewed and compared your superannuation fees make a decision on whether to stay with your current fund or change.
CHANGING YOUR SUPERANNUATION FUND
Changing your superannuation is a fairly simple process. The easiest way to go about it is to sign up for your new fund online, fill out the online form with your details and tick the box that allows your new fund to consolidate you old super account balance into your new one. You will also need to mail off a signed copy of your form.
When filling in your application form you can opt in to the new superannuation funds insurance cover and select income protection insurance cover is you want that additional insurance cover. You will also need to choose beneficiaries and select an investment option from your super funds available options. For more information on these see the Investment Options listed below.
When you receive your new superannuation membership number give this to your work’s Payroll Officer as soon as possible so they can ensure all future superannuation payments are paid to your new account.
>> If you want to learn more about achieving financial freedom check out How the Debt Snowball Can Get You Debt Free Faster
THE TRUE IMPACT OF SUPERANNUATION FEES
Canstar Australia’s biggest financial comparison site did an analysis on two different people’s superannuation funds to consider the future superannuation balance of two 25 year olds if they paid fees of 0.75% and 1.75% a year. The assessment was based on incomes of $45000 a year and $70000, increasing 4% annually. With 10% of their salary being contributed to superannuation annually until the age of 65. An investment return of 8% annually was used.
The findings were the someone earning $45000 per year, with the above conditions, could potentially accumulate nearly $330000 more in super if they had lower fees (0.75% versus 1.75%), whilst the person earning $70000 per year could have over $450,000 more in super with the lower 0.75% fee compared to the 1.75%. The results can be found in the table below.
|Earning $45,000 per year||Earning $70,000 per year|
|Salary increase annually||4%||4%||4%||4%|
|SG rate (annual contributions)||10%||10%||10%||10%|
|Investment return in super each year||8%||8%||8%||8%|
|Annual fees (%)||0.75%||1.50%||0.75%||1.50%|
|Beginning super balance||$25,000||$25,000||$25,000||$25,000|
|Super balance in 40 years, at age 65||$1,880,074||$1,551,237||$2,696,232||$2,240,590|
|Difference in super balance||$328,837||$455,642|
This example demonstrates how important it is to consider the superannuation fee when determining your chosen super fund and monitoring them closely. Choosing the wrong one could cost you tens of thousands in lost super over your investment period.
CHECK YOUR INVESTMENT ALLOCATION OPTIONS
This is the type of investments you have in your super fund and can include Australian and International Shares, Property, Infrastructure, Bonds and Cash Investments. Your super fund will have a range of investment options that may sound complicated but to help you decipher them, here is a summary of the four main investment options:
Growth options are ideal for people in their 20s or 30s. These investment options are made up of 85% shares and property investments or a high growth option will hold 100% in these investments types depending on the risk you are prepared to take on. Growth investment have the most risk. Expected rate of return is 6.2% before fees, taxes and other costs with a High volatility rating.
Balance investments are a make up of approximately 70% in shares or property and the remaining 30% in fixed interest and cash. This is a good mid-point for people that are not nearing retirement and want growth, but want to avoid the high level of risk that come with a 85-100% asset allocation in the growth options. Expected returns before fees, taxes and other costs are around 5.7% with a medium volatility rating.
Conservative investments are a blend of about 30% in shares and 70% fixed interest and cash. This holds the least risk and is a better investment option for people approaching retirement. The expected return for this asset allocation is around 4.2% before fees, taxes and other costs and have a low volatility rating.
Cash investments options invest your money in Australian deposit taking institutions aiming to reduce the losses in investments. The expected return of these investments are under 3% before fees, taxes and other costs and have a very low volatility rating so are better for people who want to keep their money safe and to keep up with inflation but are not looking for growth.
For more information on super investment options and asset allocation check out Money Smart’s Super Investment Options.
REVIEWING YOUR SUPERANNUATION’S PERFORMANCE
This can be found by typing in” your super fund investments performance”. Take into consideration the 5 and 10 year investment performance of your chosen investment option.
You ideally want to cover your annual fees of say 1% and inflation at 4%, a required return of 5% to keep ahead of fees and inflation and more than that in order to grow your investment. Review your superannuation funds performance regularly to consider whether your superannuation fund is giving you a sufficient return on your investment.
For more help in comparing your superannuation funds performance check out Canstar’s Compare Super Funds. Simply select your age and investment balance and it will populate a list of superannuation funds including the past 3 years performance of the fund.
CONSIDER SALARY SACRIFICING TO YOUR SUPERANNUATION
Consider salary sacrificing some of your before tax wages and take advantage of the tax concessions on offer. If you earn over $450 a month, your employer must pay 9.5% of your salary to your super fund this is called the Superannuation Guarantee. If you earn over $37000 a year you are paying a marginal tax rate of 32.5% plus 2% for the medicare levy for every dollar earned above this.
Superannuation contributions are taxed at 15% for individuals with income under $300,000 up to a maximum contribution of $25000 per year. By salary sacrificing some of your before tax wages to superannuation you will be giving yourself a tax discount of 19.5% per dollar.
In The Barefoot Investor, Scott Pape recommends that if you are in a position to do so – meaning you are debt free and have bought your first home and have saved up your three months of expenses – you should then consider topping up your 9.5% employer contribution to a full 15% – an additional 5.5% of your after tax wages.
On a salary of $70000 before tax with a marginal tax rate of 32.5% + 2% medicare levy, if you were to contribute an extra 5.5% to your super, a total of $3850 a year, you will reduce your tax bill by $750 a year ($3850 x 0.15 vs $3850 x 0.345).
If you have taken all the above steps you can pat yourself on the back. Many other Australians have yet to do this and a rolling on auto-pilot and may not wake up until they are fast approaching retirement age.
Don’t forget to review your investment option over time. Consider your age and the type of investment option you should adopt, growth is you are in your 20s-30s, Moving to less risky balanced investment options as you approach your 40s and moving to larger cash asset allocation investments as you approach retirement.
From here please don’t return to auto-pilot mode. Set yourself a regular reminder to review your super. Quarterly should be frequent enough or you can do this monthly if you prefer. Grab your phone and set a digital reminder in your calendar for the first day of each quarter to check your investments. Now you won’t have to think about it until your reminder goes off and you can do a quick review and go back to whatever you had planned for your day.
Have your read the Barefoot Investor? What was the most valuable part in the book for you? Comment below with how it has helped you on your financial freedom journey!