afr 22nd april 2015 Sally Loane CEO of the FSC photo by Louise Kennerley afr 22nd april 2015 Sally Loane CEO of the FSC photo by Louise Kennerley
The superannuation industry often talks about the challenge of getting young people “engaged” with their super.
Most recently Sally Loane, the chief executive of Financial Services Council, warned of “dire” consequences to disengagement at the FSC Leaders Summit in Sydney recently. “The more we allow, and indeed condone, apathy and disengagement, the worse off young people will be at the end of their working life, and so will we, the taxpayer,” she said.
Super funds are constantly looking for new ways to make themselves seem more exciting. Some have even try to “gamify” the super experience – rewarding members taking certain actions on the website by giving out badges or informing them they’ve achieved a “level up”.
There’s an air of desperation to all this attention seeking. There’s no doubt that most young people are not “engaged” with their super. But is all this fuss really serving the interests of members or are funds just being needy?
Loane cites surveys that suggest young people prioritise near-term goals such as buying a house. But is that so bad? All the super industry’s estimates for “comfortable” retirement assume home ownership.
The whole purpose of super is to “set and forget” and let time do the work.
The thing is you need to make the effort to get the “setting” part right. Here’s a simple checklist that every super member should do once every year or two … or just when major life events occur.
First, choose a good fund. I explained how to do this in a recent column. Look at the long-term returns, on a site such as SuperRatings. Also check sites such as Market Forces to make sure your fund takes the financial risk of climate change seriously – you don’t want to find you’ve unwittingly invested in a coal port that’s gone out of business.
You can usually choose your fund. There are two main types of funds – industry funds that return profits to members and retail funds run by financial institutions such as banks for a profit. Industry funds have historically out-performed retail funds on average, but there are good and bad in both categories. You don’t have to work in an industry to join the applicable industry fund – there’s nothing to stop a waiter joining Local Government Super, for example.
I wrote recently about a child actor who found all his super was eaten away by fees and insurance premiums. Judging by the response, this is a very common problem, not just for kids but anyone who earns a low or sporadic income. If this is you, look for a low-fee fund. When the balance is low, minimising fixed fees is more important than the investment returns. SuperRatings has a list of the top 10 funds with the lowest fees.
Second, choose the right investment option. When you’re young, you should probably be in a growth fund. It’s higher risk but over the long term should deliver higher returns. If you’ve got decades to go before you retire, you can usually afford the risk.
Third, consolidate your accounts. Otherwise you could be paying multiple sets of fees and insurance premiums. There’s a good guide to how to do this on ASIC’s MoneySmart website.
Fourth, review your insurance needs. By default you have life insurance, which pays out on death and also total and permanent disablement (TPD), and sometimes income protection insurance. You can opt out but think carefully before you do. If you have dependants (usually children) or liabilities (such as a mortgage), then life insurance is important. In some cases you’ll want to increase your cover.
Fifth, consider making a small personal contribution. That’s if you’re not madly saving for a house or trying to pay off a mortgage. Behavioural economists know that people adjust to their take-home salary – so if you can force yourself to save before you even get the money, you probably won’t even notice it. Your 20s and 30s are a great time to contribute to super, because of the magic of compound interest. Time is your greatest asset when investing, and superannuation is the most tax-effective way to invest.
You can contribute through salary sacrifice if it’s offered by your employer. But there’s also a new law that means you can do it yourself and claim a tax deduction at the end of the year. You can set up a direct debit so the money drips into your super account frequently, or even use tools such as the Acorns app to sweep digital “spare change” into your super account. By contrast, many employers only deposit super every three months … if at all (unpaid super entitlements are a big problem in ). The downside is that you don’t get the tax deduction until the end of the year – but if you like getting a tax refund, then you might consider that a benefit.
Sixth, make sure your binding death benefit nomination is up to date – that is, letting your fund know who should get your money if you die.
Seventh … nope, that’s job done, actually. Forget about it for a while. Make a date to spend an hour or two reviewing it in a year’s time, or maybe two.
Don’t get sucked into fiddling around with your investment options constantly. You pay transaction costs every time you buy and sell and you’re probably not as good at it as you think. If you could time the market, you’d have made a motza from share trading and be retired already. If you want to try, do it with your “play money” not your super.
This also means you shouldn’t worry about whether your fund has a great app or mobile experience. There are new disruptors that make this a selling point, but it’s more important that the investment returns are good and fees are low.
Don’t buy into the fearmongering about how much you need in retirement. Some very smart people think the super industry’s definition of a “comfortable” retirement is inflated. The super industry, naturally, disagrees. I reckon there’s plenty of fat in it, but take a look for yourself.
The average young person will have a lifetime of compulsory super of at least 9.5 per cent of your salary and this is slated to rise to 12 per cent. If you’re aged under 54 now, you can’t get to your super until you’re at least 60 and you can bet they’ll put the age up before you get there.
If you think you might need money to buy a home or any other important purpose before you’re allowed access to your super, then keep your money outside the system – or use the new first home super saving scheme. You can invest outside of super and earn similar returns – it’s not as tax effective, but that’s the price of freedom.
Caitlin Fitzsimmons is the editor of Money. Find her on Facebook or Twitter.