The word ‘superannuation’ might make you think about those ads with actors forming a diamond with their hands, or perhaps it makes you yawn. But optimising your super from your first job could be the easiest money you will ever earn.
Super is effectively 8.7% (and soon 10.7%) of all the money you will earn from employment. Just because it isn’t as visible as the funds in your bank account, doesn’t make it less valuable. With current political trends, who knows if the government will be there to support our generation in retirement. Fixing your super now can be the difference between retiring in Hawaii with your family and being unable to support yourself.
If that wasn’t a convincing enough argument for why you should care, here’s another. Another way you can access your super is in times of hardship, or to pay for a medical treatment. Sorting your super now could help ensure you or a loved one are able to flourish even amongst the vicissitudes of life. ASIC’s Moneysmart states that “a 1% difference in fees now could be up to a 20% difference in 30 years,” potentially adding up to the hundreds of thousands for you later.
Here are three simple things I think will make the most difference for you.
First, choose a risk class which suits you. If you take FINA1221, you’ll learn that volatility is the risk that actual returns will not equal expected returns. Skipping a few concepts, the greater the risk, the greater the likely average return over the long-term. This means that if you choose a higher risk (or more aggressive) fund, you will average higher returns, but they may only materialise after ten years.
Given that a majority don’t access their super until they retire, which will be at sixty-seven for most readers, there is a long runway for growth. For younger readers, choosing a more aggressive (and riskier) fund for the first ten or so years of their working life can set a great foundation for future compounding.
|Average Return for Different Risk Funds for Past Five Years: Stockspots Top Ten|
|High Growth Funds||12.46% p.a|
|Growth Funds||10.22% p.a|
|Balanced Funds||7.75% p.a|
|Moderate Funds||5.91% p.a|
Source: The Fat Cat Funds Report 2018
Next, make sure you aren’t paying too much in fees! Every year, Chris Brycki and the team at Stockspot compare superannuation funds and compile a list of the best and worst funds. They state that a fund with 1.5% higher fees is likely to equate to more than $200,000 lost over a lifetime.
Now, it may seem like higher fees should equate to higher returns. However, in funds management, the higher the fees, the more the fund has to return every year just to meet the index benchmark. What this means is that every basis point of fees is a basis point you are starting behind at the beginning of each year. Stockspot found that only one in twenty funds can beat the equivalent index after fees and taxes.
So how does one compare and choose a super fund? Using comparison websites such as Canstar can be a great place to start. Then, after working out how much risk you’re comfortable with, compare the returns and fees of different super funds over the long term. ASIC’s Moneysmart mentions that you shouldn’t be enticed by the last year’s return; make sure you compare the five, seven, or ten-year returns as these will give you a more accurate picture of the long-term return of the fund. Ensure you compare these against your current super fund (likely the default fund your first employer chose).
Great, I’ve found a super fund which is the right mix for me, and I’m going to save myself a Tesla-worth of fees – what now? Typically, you must complete the online membership application for your chosen fund. Once this is completed, you should have the option to rollover the super from your previous fund by providing their ABN and your membership/account number. After this, you will be required to notify your employer of your new account. You can usually simply download a pre-filled form from your new super provider’s website, sign it, and give it to your employer.
Finally, consider ‘topping up’ or making contributions to your super. If your income is less than $38,564 for the 2019-20 financial year (don’t ask me how they come up with these numbers), then you are eligible to receive a $500 government co-contribution to your super when you contribute $1000. This might not excite you – think about how excited I just got when writing about a 1% difference – but this is a 50% contribution the government is giving you! People rave about how the ASX returned about 20% in 2019. Well you can make a 50% return on $1000 simply by depositing it. To illustrate what a small change now can make, the graph below demonstrates what would happen if you contributed $1000 per year over three years with the co-contribution (perhaps at uni) and did nothing else.
Investing $4,500 at 10.22% Per Annum Over Thirty Years
At the end of the day, it’s up to you to take control of your super, and the sooner you do it, the sooner you’ll benefit. Although approaching super may seem daunting, just simple changes following a few google searches can have a massive impact on your life.
The information provided in this article is general only and does not take into account your specific circumstances or financial needs. You should seek advice from a licensed and trusted professional to obtain specific information for your circumstances and needs.
Words by Brook Lewis
Image by Fabian Blank (via Unsplash)