19 Dec 4 Ways Your Super Can Veer Off-Course – And How To Get It Back On Track
Superannuation is a vehicle to a destination far ahead. But just like any long-distance drive, you can’t take your hands off the wheel or your eyes off the road – even on the long and boring highway stretches.
Here are four of the fastest ways I’ve seen people drive their super into a ditch:
1) Inappropriate Asset Allocation
Many super funds have age-appropriate default options designed to save us from ourselves, but it’s not a guarantee you’ll be in the most appropriate asset allocation for your circumstances.
While personal risk profiles should be considered (the amount of risk you are comfortable with based on your own experiences and personality); sitting in a conservative option of mainly cash and fixed interest can leave your super stuck in first gear and really hurt a younger person’s chances of retiring comfortably.
According to ASIC’s Superannuation Calculator, conservative portfolios are expected to return an average of 3.8% p.a., and high growth investors 5.2% p.a. These seemingly small variances can make ALL the difference.
For example, ASIC’s calculator suggests that for a 25-year-old with $10,000 in super, earning $80,000 p.a. as an employee with no additional contributions, the difference between a conservative and a high growth portfolio would be a massive $93,134 (in today’s dollars) by the time they retire at age 67. ASIC’s projected returns are also extremely conservative and historical data indicate that the difference could well be much larger. You can use ASIC’s calculator to run your own comparisons here.
Conversely, an older person with a high growth portfolio who is merely a couple of years from retirement could receive a very nasty surprise in the event of another Global Financial Crisis. Think of trying to tackle the off-ramp whilst still in over-drive! As explained by AMP’s Shane Oliver in “Oliver’s Insights” on 24 August 2017, equity markets fell 55% between November 2007 and March 2009, so imagine the impact on your retirement plans if your portfolio was over 90% invested in equities!
2) High Fees
The superannuation industry has recently been through a major shakeup, and hidden adviser commissions and uncompetitive fee models are these days largely limited to legacy products. However, if you have been complacent, your superannuation (or a portion of it) could still be sitting in one of these older and less competitive products.
As a rule of thumb, ASIC’s superannuation calculator indicates that for a growth investor in a mid-level fund, total fees might be around 1.2% p.a. of the account balance. If you are receiving ongoing support from a financial planner, they may add an ongoing ‘advice fee’ on top of this figure; but you should be receiving service and advice in return! If you are not receiving ongoing support and your fee is significantly higher than this, you are likely being overcharged. This can have a massive impact over time. Try experimenting with different fee levels here.
3) Default Insurance Cover Woes
Employer-sponsored superannuation funds are legally required to offer default cover and this will usually include:
- Life Insurance; and
- Total and Permanent Disability (TPD) insurance
That means that even if you do nothing, you will most likely be opted into some level of cover. This is not always a bad thing (most Australians are under-insured), however, there are several ways in which this can be problematic, and I’d strongly suggest seeking professional advice:
1. Default cover amount – the amount of default cover is different from fund to fund and the sum insured may be too high or low for your individual circumstances. A sum that is too low can give a false sense of security, and a sum that is too high will result in excess premiums eating away your account balance, having a huge impact on your final retirement benefit.
2. Beneficiary selection – default insurance cover makes it even more important to nominate an appropriate beneficiary. Without this, your untimely death could result in a large sum of money going somewhere unintended, or being taxed at an unnecessarily high rate.
3. Default smoker or occupation status – some funds default all members to smoker status and/or blue collar premium rates. So, unless you tell them otherwise, your super fund may assume you are out digging ditches while sucking on a Winnie Blue. This protects the insurer from unknown risks, but it can cost you an absolute fortune. It’s vital that you engage with your fund and find out:
1. Whether they charge different premium rates based on smoking status and/or occupation; and
2. Whether you have been categorised correctly.
Just 10 minutes of your time could save you a huge amount of money in the long run!
4. Sub-par cover – your fund might not offer the best or cheapest cover. It’s a myth that group rates are always lower and it’s important to seek professional advice to ensure that your cover is appropriate. Warning – cancelling your default cover before new cover is in place could leave you exposed. Any external cover will likely need to be underwritten, which could result in premium loadings or exclusions due to health issues.
4) Low or Missing Contributions
There are three factors here:
1. Employers skipping out on their obligations (and employees failing to hold them accountable)
Sometimes employers shirk their responsibilities to their employees. Maybe cash flow wasn’t great last quarter and they’ll make it up later, or perhaps there’s other reasons – it doesn’t matter. All employees who earn more than $450 per month must have 9.5% of their earnings contributed to superannuation on their behalf. This must be done at least quarterly, within 28 days of the end of the quarter. If they can’t afford to do this, they can’t afford employees – it’s a compulsory part of the remuneration.
Check your statements! If contributions are missing, raise it with your employer immediately. If your employer doesn’t resolve it promptly, contact the ATO who can compel your employer to contribute on your behalf. Don’t let it go on – I’ve seen businesses go under because they didn’t set money aside for super contributions and by the time they were compelled, the sum outstanding was so large they couldn’t make it up.
2. Failure to make personal contributions
This is a common pitfall for the self-employed. Too often, people put off contributing until it’s too late and end up with an impossible mountain between them and their desired lifestyle in retirement. The earlier you start, the longer your contributions have to grow and earn compounding returns. Even if you are an employee, compulsory super contributions are not likely to be enough depending on your desired lifestyle. Small amounts over long periods of time can make a surprising difference, and the earlier you start, the greater the impact will be.
3. Gender differences
Women often retire with far lower balances than their male counterparts. This is mainly down to:
- The gender pay gap; and/or
- Taking time out of the workforce to raise children (usually the greatest contributor).
It’s tough to put extra away during these years, but if you are facing a period of reduced income, you could consider asking your spouse (if possible) to split his or her contributions with you. Also consider point 2 above – putting a bit extra away before and/or after any periods of reduced income.
Seeking professional advice will enable you to understand your situation, assess the options and decide which road is right for you. After all, you want to ensure your retirement funds are on the freeway and out of the backstreets – for the sake of your future self and your family!
GENERAL ADVICE WARNING: All information in the above post is general in nature and is not intended to be personal advice. You should be aware before acting on any of the above that I have not taken your personal needs or financial situation into account and therefore any advice provided, implied or otherwise, may not be appropriate to your personal situation.