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Is a SMSF for me?

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I am 35 years of age and have not been impressed with the performance of my super fund in recent times and am thinking about setting up a self-managed super fund (SMSF). It seems to be pretty popular nowadays but I don’t know if it is for me.

I have been salary sacrificing and have put some inheritance into my super and so I have about $200,000 in my super, so is this enough to justify setting up a fund?

My recommendation is that you do some homework on what it means to run your own super fund to work out if you’re the right kind of person to do it yourself. If you read up on stocks and finance stories in newspapers, magazines and websites, you could be made of the right stuff but you also need to be organised, because you’re doing something really important.

A fund can have up to four members who are called trustees and each trustee should be involved and informed about decisions made for the fund and so you need to have your fellow trustees singing from the same hymnbook. As a general rule, the industry thinks you need about $300,000 to make a SMSF pay its way against its rivals – retail and industry funds.

This figure comes from the fact that the costs of running your fund will involve accounting costs and auditing. Also, you could have broker costs and some people use a financial planner to help manage the fund and all of these can pump up the costs.

Various super funds can cost around one per cent a year – some are cheaper while others are dearer – but if you had $300,000 in your fund and you paid $3000 to cover your fund’s costs, then the cost would be one per cent.

In your case, as you only have $200,000, it would be dearer at 1.5 per cent but if you plan to keep adding to your super via salary sacrifice and you can, say, use online brokers or not change your investments all that often, you could trim your costs down to make the fund less costly.

Some investors select shares which have a good history of paying dividends and which are fully franked and so the tax implication can mean that some super funds receive a tax refund. This can reduce the ultimate ‘cost’ of a fund.

As you can see, there’s a lot to learn about SMSFs and the more work you put into it, the more rewarding the whole exercise will be.

By the way, the Australian Taxation Office is in charge of SMSFs and they have an excellent website where the rules of the game and a whole host of important questions are answered.

One last recommendation – do some homework on what constitutes your appetite for risk and how to construct a portfolio of assets that reflect your risk profile. A viewer of my TV show told me he had a million dollars in his SMSF in six great blue chip stocks and that was all. He did really well as the share prices kept rising and the dividends were great but when the GFC hit, his portfolio shrunk to $300,000! He was thinking about going to cash when the GFC hit its lowest moments and if he did that he might have missed the 50 per cent plus bounce in 2009. If he had a better portfolio of assets, say, with 60 per cent in shares and 30 per cent in an investment property and 10 per cent in cash he might have had a much less scary encounter with the market crash.

Some early starters get some good financial advice at the beginning and then try it on their own, which can be a good idea.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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.

Published on: Wednesday, April 27, 2011

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer, Roger Montgomery, Paul Rickard and Charlie Aitken the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

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