Over your lifetime, you’re poised to accumulate a substantial income. While a considerable chunk of your earnings naturally goes towards the mortgage, everyday essentials, and the unpredictabilities of life, it’s crucial to acknowledge that a significant 11 percent of your income is set aside for you through mandatory superannuation contributions. This sizable sum warrants careful consideration to maximise its full potential for a secure and rewarding future.
The hidden drain on your super savings
Your superannuation savings might be silently diminishing due to suboptimal investment allocations and excessive fees lurking in the background. The notion that someone is continually diverting funds from this account year after year is disconcerting. If this were happening in your regular bank account, you’d sound the alarm without hesitation. However, it’s surprising how many individuals tolerate this situation when it pertains to their superannuation.
Investing wisely
Imagine leaving $500,000 languishing in a bank account earning a mere 1 percent interest. You’d be eager to seek out a sensible investment opportunity. You’d scour the internet, consult with friends and family, and perhaps even seek professional advice. But remarkably, countless people leave their superannuation untouched, without delving into its investments or understanding its inner workings.
The unanswered questions
When you delve into the world of superannuation, be prepared to find more questions than answers. Are your investment returns aligning with your expectations? Are the associated fees reasonable? Will your superannuation nest egg be sufficient to support your retirement? How does super even work?
Cracking the superannuation code
Superannuation, at its core, is a straightforward concept — a tax-efficient vehicle for securing your financial future. Yet, with a staggering $3.5 trillion invested in superannuation, it’s evident that many entities are eager to tap into this reservoir and charge you for managing it.
Key aspects to maximising your super
To optimise your superannuation, you must delve into several key aspects:
1. Management fees
The fees you incur depend on your chosen fund and its features. At the most basic level, you can opt for a multi-sector fund that diversifies across various assets, typically charging between 0.1% and 0.3% in fees. For the cost-conscious, index funds passively track the market and offer a cost-effective option. If you want your super actively managed, meaning you want someone to try and pick the winners and do better than the average stock market, then you can expect to pay between 0.3% and 0.8% in total.
2. Investment allocation
Where your money is invested is crucial. You need to match where your money is invested with your risk profile as well as your overall financial strategy. As retirement approaches, a more conservative approach is advisable to protect your capital. If you have more than 15 years to go until you need to access the money, you have the time to take on greater risk. You don’t want to be 100% shares days before you retire. Similarly, you don’t want to be 50% cash in your 30’s and only earning a few percent each year.
3. Alignment with values
Your perspective of the world and the economy should be taken into consideration when making investment choices. There are experts out there who’s job it is to understand what’s going on and help you make decisions (or make them for you), however it’s important that your investments reflect you as an individual. Consider your personal outlook on the world and the economy when making investment choices. Increasingly, many people are considering ethical investments, and avoiding investments in industries like coal, gambling, and tobacco due to their personal values.
4. Performance history
Not every investment manager is going to be the best year in year out. However, past performance over a period of time can provide insights into a super fund’s track record and decision-making competence. While it doesn’t guarantee future results, historical performance data is worth considering.
5. Alignment with your overall financial strategy
Super is not a stand-alone concept – it works in conjunction with the rest of your financial plan. Assess whether your superannuation balance aligns with your overall financial strategy. You might have substantial wealth outside of super, so the need to contribute more to your fund isn’t as strong. But for some, superannuation represents their primary source of retirement income, necessitating doing everything to help it grow. Even if you’re still paying off your home, adding a little extra to super will make a difference. The tax saved by putting more into super outstrips what you would be saving on your mortgage.
In summary, unlocking the potential of your superannuation requires a comprehensive evaluation of fees, investment allocation, alignment with your values, performance history, and fit with your overall financial plan. By delving into these aspects and asking the right questions, you can make informed decisions and ensure that your superannuation funds are working diligently to secure your financial future.
Consistently ranked one of Sydney’s top financial planners (Adviser Ratings), Brenton helps his clients life a great life by making the most of their money. Read his full bio here.
