If you want to make the most out of your superannuation and enjoy retirement, these five tips will boost your balance.
Grappling with the enormity of funding living expenses retirement is a challenge for most people. How much do you need? How long do you need to plan for? What if your money runs out? What if someone in the family has an illness? So, many people defer worrying about funding retirement. In Australia we are lucky, many of us have Superannuation accounts where our employer pays a percentage of our pay (9.5% in 2019) and we can’t access money until retirement age or preservation age. The design of this scheme is brilliant in that it overcomes self-control bias - the money transfer is done for us and we can’t be tempted to take it out (unless under special circumstances). However, it’s not a perfect system, and many people miss out (self-employed people, business owners, people on government benefits). Because it is also a percentage of our income, people that earn more benefit more than people who earn less. If you want to make the most out of your superannuation and enjoy retirement, these five tips will boost your balance.
1. Understand your capacity to take financial risk and invest accordingly.
Time is key to understanding investment risk. If you have time on your side, you can ride out market volatility that is caused by economic circumstances. Young people, therefore, should be able to assume more risk than older people. If you need to liquidate the investment in the next 1 to 3 years, you might not want to assume too much risk so you can preserve the capital (the money you put in). If you are very sensitive to losses, and don’t think you will cope well if the investment loses money, then you should avoid too much risk. Finally, your risk preferences are likely to change over time, so it’s important to re-evaluate your approach to risk-taking regularly. Choices generally range from conservative (low risk), to balanced (medium risk), to growth (high risk).
2. Check the fees charged to your account.
In fact, fees charged to our Superannuation accounts were recently identified as a big problem for many Australians. The Australian Financial System Inquiry in 2014 showed that operating costs and fees appear high in Australian superannuation accounts by international standards. The Productivity Commission report into Superannuation in 2018 highlighted significant gaps and inconsistencies on how funds report data on fees and costs.). From the 1st of July 2019 changes to protect super balances being reduced by inappropriate insurance and fees were applied. This includes cancellation of super funds on accounts that haven’t received contributions for 16 months, abolition of exit fees if you decide to leave your super fund, a limit on fees for low-balance accounts, and inactive accounts are transferred to the ATO for merging with your other superannuation accounts.
What may benefit you most though, is considering switching to another provider. The big financial services providers have long relied on customer loyalty for their high profits and market share. They take advantage of the ‘lazy tax’, that is, that customers stay in relatively high cost products because of the effort and cost it takes to switch out. Making phone calls to negotiate better deals on financial services in general, like insurance, mortgage, electricity and phone contracts may prove rewarding, even if you use a better deal advertised to negotiate with your existing provider.
3. Check you don’t have multiple superannuation accounts.
When a person holds multiple superannuation accounts, as many of us do inadvertently, the impacts of administration fees and excess insurance on wealth erosion is estimated to cost $2.6 billion a year. It’s best to check your super statement, compare fees and investment returns, and consolidate accounts.
4. Set a goal for your retirement savings.
Giving thought to what you want to achieve is important. Without an idea of where you want to go, it is impossible to plan the steps associated with getting there. Setting goals is important because it gives you focus, allows you to measure progress, makes you accountable and helps us to believe in ourselves and build our sense of financial confidence and self-worth. Thinking about questions such as the lifestyle do you want in retirement, how long you’re likely to live and big costs in retirement will help you to understand how much superannuation you need. Current guidance for a comfortable lifestyle for couples is around $60,000 per year.
5. Understand the power of compound interest.
Compound interest is interest paid on the initial amount of money, as well as the accumulated interest on money already invested. You earn interest on the money deposited plus interest already paid- interest on interest! Investing your money for long periods of time with reinvested interest payments really accelerates your wealth accumulation. Consider salary sacrificing more money into superannuation if you can afford it, to take advantage of the compounding returns as well as the tax advantages.
If all this seems a but daunting check out How super works. Here you’ll find further info and guides that will help you make good decisions in regard to your super.”
Dr Tracey West is running an online course, Financial Life Skills.
Dr Tracey West
Dr Tracey West has a strong background in household finance, with several publications on household finance, financial literacy and financial planning issues. Tracey's research contributes to knowledge on investor behaviour, informing curriculum development and guidance for advisors in the financial services industry.