Show super some respect
by Peter Switzer
Dangerfield was famous for his line: “I get no respect,” and so it’s time to show super some respect.
Nest egg strategy
The penny dropped for me years ago when I saw a neat explanation about how by saving early and often in one’s life can lead to a wonderful nest egg when you stop working.
The simple example said if you saved $2,000 a year between the ages of 21 and 30 and put it into a fund that returns nine per cent per annum and you just let it roll over just like in super, the long-run returns would be literally super.
In fact, if someone stopped saving and became irresponsible from age 30, the lump sum would roll over to top half-a-million dollars! But get this, if the person remained responsible and kept saving, the bankroll would end up over $1 million.
And if they doubled their efforts, we’re talking more millions!
The powerful lesson is that regular saving with reasonably good rates of return with concessionary tax rates, just like super, combined with the magic of compound interest will produce a beautiful set of numbers upon retirement.
Rule of 72
Using an equation called the rule of 72, you can see how compounding works. Imagine a 10 per cent return which after tax ends up being eight per cent and someone leaves you $20,000 when you are age 20. Rather than wasting the money on a new car, you throw it into your super fund. What could this $20,000 grow into over 45 years of working and superannuation returns?
Take 72 and divide it by eight and you get nine and that means it takes nine years for the money to double in value. So that means five chances to double over 45 years and that will see $20,000 become $40,000 to $80,000 to $160,000 and finally $320,000.
There are 320 thousand reasons for respecting super, compound interest and superannuation.
When we are reading kids bedtime stories, we should occasionally throw in a magical tale about the superannuation. Maybe the three little pigs should have different types of super sold by a ‘wolf’ of an adviser with the third little pig being the one who did his homework, who knew about his super and selected a trustworthy adviser.
Maybe I have taken the idea too far but the point to be underlined is that the third little pig respected his super and ended up with a super return.
Tips to help you respect super
If this advice is starting to make you feel a bit uncomfortable, what follows are my recommendations for learning to respect your super.
- Make sure you know exactly what is the name of the fund and what they invest in.
- Make sure the profile of the fund matches your appetite for risk. If you are risk averse, then make sure your fund matches you and understand what kinds of returns you should expect. Conservative funds return around four to five per cent but are really safe. By notching the risk up a gear to a balanced fund you could be in the seven to 10 per cent return space but remember you can go up and down by the same ‘expected’ return.
- Find out exactly how much you are being charged by the fund.
- Do a cost and return comparison with other funds. Websites such as Super Ratings can help with those comparisons. Remember some funds will be more expensive but could have a good record of high returns but they would be more risky. Risk and reward is a trade-off.
- Don’t rule out setting up your own self-managed super fund (SMSF). I believe you have to have a well-organised personality and you have to want to be a hobbyist-fund manager. You become your own fund manager, which means you need to become market savvy, you have to follow the rules of a SMSF as set out by the tax office and you have to love the idea of doing it. Alternatively, you find a trusted adviser to help you do it. This all costs money and the more you have in super the more cost-effective a SMSF can be. Consensus says $300,000 is a wise starting point but I do know others who say smaller amounts can be effective, depending on what you invest in for your fund.
- Finally, learn to love and respect your super fund as it will either make or break your life in retirement and life after work could last 20 to 30 years, so it shouldn’t be ignored.
To be honest, I love property as well — that was my inheritance — but over the years I have become increasingly attached to my super fund and that’s despite GFCs, market crashes and rule changes.
It’s still a very tax-effective way to build wealth and you have to respect that.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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Published on: Thursday, March 04, 2010blog comments powered by Disqus