For many people, thinking about superannuation is the go-to cure for insomnia. This isn’t all bad, in that so long as your superannuation foundations are set-up right, it is something that needs to be left alone to grow – too much fiddling around can be extremely costly.
But ignoring your superannuation savings completely is a mistake. Your superannuation savings are likely to be either your largest or second largest financial assets, depending on house price movements.
So let’s take a quick run through the things that are important to know about your super, to ensure this important asset is set to deliver you the best financial outcome possible.
And before we jump in, a quick reminder that each Friday morning I publish an email to everyone in the Financial Autonomy community with brief snippets I’ve come across of relevance to those seeking choice. From the World Happiness Index, to useful calculators, to a Celine Dion heavy metal t-shirt, it’s some juicy brain food to take you into the weekend. So if you’re not currently receiving this free bit of email gold, go to www.financialautonomy.com.au/gainingchoice to be added to the list.
Let’s start with how your money is invested. This is likely to be the most important factor in determining the level of growth you experience on your savings.
Traditionally, if you were to make no choice as to how your superannuation savings were invested, they would be placed by default in the Balanced Fund. Now originally a Balanced fund would mean 50% of your money was in conservative assets like cash and bonds, and 50% in growth assets likes shares and property. That 50/50 mix is why it was called “balanced”. Unfortunately however, super funds started fudging the figures, increasing the weighting towards the growth assets, because in most year’s shares and property performed better than cash and bonds. If you run a super fund, what you want is more super fund members giving you more of their money, and the best way to do that is to be able to claim to have delivered higher returns than your competitors. Sure, you took more risk to get those returns, but few people bother to look into it that much.
Now there is a bit of an upside for you the investor to all this mis-labelling. Whilst being in a true to label Balanced fund seems quite sensible and not too risky, the reality is that for the bulk of super fund members, a true 50/50 mix Balanced fund is too conservative. Sure, when the share market has one of its occasional bad years, your traditional Balanced fund won’t suffer too badly because the half of your savings in Cash and Bonds will still produce positive returns. But most years shares produce solid gains, so you sacrifice many good years just to avoid the rare bad one. Over the 30 odd years that your superannuation savings are invested, this leads to a poor outcome.
If you are more than 10 years out from retirement, your superannuation should be invested with almost all in the growth assets of shares and property. You will experience some volatility, sure, but you can’t access your superannuation savings anyway, so who cares. Remember, the balance that you see on your statement is simply telling you that if you sold everything today, here’s what you would get.
Most superannuation statements will provide a pie chart that shows how much of your savings is in each asset class. Check that your exposure to bonds and cash is pretty small. The returns on cash and bonds are low and having a significant allocation to these areas will only serve to drag down your returns over time.
Now if you are getting closer to retirement – different story. Certainly 3 years out from retirement, you would likely want to get more conservative. But from the emails I get from the Financial Autonomy community, most are in their 30’s, 40’s or perhaps early 50’s, and for you, being too conservative is the most pressing potential risk.
When you look at your statement you might see that you are in a MySuper Option. These will usually have a range of years, relating to your year of birth. This is a great system for most people as it adjusts how risky your funds are invested based on how far away you are from retirement. It’s still worth taking a look at the asset allocation pie chart just to understand what’s going on, but chances are, you’re in good shape in one of these options.
Investment options matter a lot. Some people go to enormous lengths to find a fund that is 0.1% cheaper, only to invest unnecessarily conservatively, and sacrifice 1% or 2% in returns each year.
Okay, so you’ve checked how your superannuation savings are invested. Next thing to take a look at on your statement is the insurance.
Most super funds will have a least an insurance amount payable upon your death, and usually the same amount payment if you were to become total and permanently disabled. Some funds also have insurance for temporary disablement, usually referred to as Salary Continuance cover.
Insurance cover isn’t free, but it can be important. The thing is, you will have been given a default level of insurance, but because each of our circumstances are so different, it’s unlikely this default cover matches your actual need.
Your need for insurance is greatest when you have young children and a mortgage. So at this phase of your life, you are likely to need more insurance than the default cover – often considerably more.
But if you’re either before or after that life phase, then perhaps you need no life cover at all. Maybe more comprehensive disability insurance, such as Income Protection, would be of greater value.
If you’re a member of a couple, discuss your level of insurance with your partner. If you were to pass away, they would receive your superannuation balance, plus the amount of life cover. Will that be enough for them to raise the kids?
Insurance premiums can really eat into your superannuation savings, so have a good look at what you have and ensure the cover matches your needs.
Does your superannuation statement make reference to advice fees? If so, are you receiving advice? My livelihood is providing financial advice, so of course I believe in the value of good advice. But there’s no point paying for something if you’re not getting it.
Advice fees can be turned off, so if you see these fees and you’re not getting advice, phone the super fund and ask them to switch these off.
It’s a curious thing, but your superannuation savings aren’t by default covered by your Will. For this reason funds invite you to nominate where you would like your benefit to go in the event of your death.
The problem is that these nominations can get out of date. When you first opened your superannuation account, perhaps you were single, and so nominated your siblings as your beneficiaries for instance. But years down the track you have a partner, a mortgage, and perhaps even some kids. Yet your siblings are still listed as your beneficiary. Or even worse, an ex-partner.
So check who you have nominated as your beneficiary. And if you have no-one, think about who it should be and advise your super fund. There will be a form that you can grab from their web site, or failing this, just give the fund a call.
Most funds these days provide the opportunity to lodge a non-lapsing, binding, death benefit nomination. This is jargon I know, but if you have that option, you would generally take it. It means that your nomination of beneficiary continues until you tell the super fund otherwise – ie. it doesn’t lapse, and the “binding” element means the super fund trustees don’t have any discretion when making the payment. They must pay to the person you nominate, full stop, the end.
Some superannuation statements now are starting to provide a projection as to how much retirement income you’re on track to generate. This is really handy and if your fund provides this, it’s worth paying attention. Your balance bobs around a bit depending on what investment markets are doing, so focusing on the balance too much can be counter-productive. It can for instance lead people to be too conservative when markets are poor, and too aggressive when markets are at peaks.
Focusing instead on projected retirement income is far more stable, and is much more related to what the entire purpose of superannuation is.
Final superannuation thoughts
Did you know that superannuation savings are protected in bankruptcy? Now I hope bankruptcy is something that you never face, but I’ve dealt with a few people who have gone through bankruptcy, and having their super intact at the end of it has been really important to their mental health and long term security. So it’s worth remembering that superannuation is your ultimate safe haven asset.
Whilst you’re building up your superannuation savings, you are buying investments. Every time your employer put money into your superannuation account, you are buying units in the fund. That being the case, as a buyer, you like low prices. Low prices are when markets drop.
Now historically, investment markets go up 8 or 9 years out of every 10. But for 1 or 2 years in every 10, they go down, and sometimes sharply so. During these down years, always keep in mind – you’re a buyer, and as a buyer, low prices are good for you. Don’t panic, and don’t switch to cash.
Well, I hope that helps you make sense of your superannuation statement. If you need any help with your superannuation and retirement planning, visit the Work with Paul page to find out how we can assist.