• A Super Retirement

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10 June 2009

Superannuation is complicated. It is also mandatory if you earn more than $450 per month or work more than 30 hours per week. For some, it is the largest investment they will ever make. For that reason alone, superannuation should be something that you monitor closely. It can mean the difference between retiring comfortably and stress-free or retiring with an unnecessary degree of financial hardship and insecurity. Some things to think about:

Choosing a fund

Choosing a super fund is a little like choosing a bloke. You want one that gets richer as it matures, with no hidden catches.

Fees & charges: Look at the fees that each fund charges. High fees eat into your super and diminish your returns.

Which fund is best for me? Compare different types of funds before you make a decision. Retail funds typically charge higher fees than industry funds. See below for a breakdown of what each type of fund refers to:

◊ Corporate funds: Generally, these funds are only open to people working for a particular employer or corporation. Sometimes ex-employees or relatives of an employee can also join the fund. (Employers may run their own plan or run it through investment managers or a master trust.)

◊ Public sector funds: Generally, these funds are open to Commonwealth and State Government employees.

◊ Industry funds: These funds are open to most people. Otherwise, you can join if you work in a particular industry or under a particular industrial award and your employer signs up with the fund.

◊ Retail funds: Open to everyone. Financial institutions maintain these funds.

◊ Self-managed super funds (also called SMSFs): Open only to you and up to three other people (who cannot be your employees).

It’s your money: when you choose a super fund, you will be asked to choose your investment options, or risk level. Investment options marked as ‘growth’ (eg. shares and property) are riskier, while options described as ‘defensive’ (fixed income and cash) are safer, but usually produce lower returns. You can choose to invest in a mix of these, or choose a higher or lower risk option depending on how close you are to retirement. Generally, the younger you are the more risk you can afford to take on, because you have time to overcome losses.

Recent super losses and you

Last year, and this year, most superannuation funds took a huge hit to their profits, and many funds made a loss. The average loss was around 6%, with some funds making a loss of up to 17%, effectively wiping out most of the gains made over the last five years. This has shaken many people’s confidence in the security of their superannuation, and for some people nearing retirement it has diminished their financial freedom. This is unfortunate, but not unprecedented, and if you still have a way to go before retirement you can make the losses back. Don’t change funds suddenly – consider all your options and how your fund has performed compared to others. This may involve consulting a financial planner. You may decide to look at what ‘risk level’ you have set for your super. If you are close to retirement, it may be worth lowering the risk of your investment to protect your retirement money. If you are younger and plan to remain in the workforce, you may decide to keep investing in riskier areas (shares and property) because the profits, in good years, are usually higher.

Changing jobs

When you change jobs you have several options. You can leave your current super in the old fund and open a new fund. This may have consequences in terms of fees, though, as you may end up paying fees on both funds. You can ask your new employer to pay contributions to your old fund (they may not always be able to do this). Or, you can transfer the money into your new fund. This may incur exit fees from your old fund.

Finding lost super

If you suspect that you have ‘lost’ super buried away somewhere – perhaps you’ve changed jobs or names – then it’s worth checking to see if you are entitled to any unclaimed super. There are several billion dollars’ worth of lost super in Australia. Go to: www.ato.gov.au with your Tax File Number, full name and date of birth to see if you have any lost super that you may be able to consolidate into your current fund.

Women and super

I don’t mean to be a cynic, but divorce rates speak for themselves. Women are far less likely than men to re-marry after divorce, and women are not always willing or able to rely on a spouse to support them in retirement. Most women’s working lives are interrupted by bearing and raising children, and women tend to be slugged with other carer roles, such as caring for elderly parents, which means that women are far more likely than men to work part-time or not at all, and for those women who go back to working full-time the usual promotion pattern has often been disrupted. Women returning to the work force are therefore less likely to be promoted to higher-paid positions, or at least not in the same timeframe as men. On average, women will spend around 20 years in the paid work force, compared to around 38 years for men, and will accumulate around half the retirement savings of men. This huge discrepancy means that many more women than men are left to rely on the age pension, and experience financial difficulties and insecurity in retirement.

So what can you do to secure your financial future? The best thing to do is plan for retirement early, no matter how far off it seems. Consider that you may have to support yourself 100% in retirement and consult a financial planner. Look at the investments you should be making for your future. If you have a spouse and you take time off to have children, have your spouse contribute to your superannuation fund while you are not in paid work. He will attract a tax break for doing so and it will make up for some of the financial disadvantage of having children.

If you divorce, speak to a financial planner as soon as possible. Superannuation is considered an asset accumulated during your marriage and can be divided up (though there may be tax consequences for doing this).

Voluntary contributions

If you are on a low-to-average income, chances are you will not end up with enough superannuation to retire comfortably if you rely solely on your employer’s obligatory 9% contribution. By ‘comfortably’, I mean on a retirement income of $35,000 – $40,000, which requires a superannuation sum of around $500,000. To make up for the shortfall, consider making voluntary contributions to your super. These attract a tax break as well as assisting to secure your financial future.

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