We all dream of retirement, and luckily, in Australia, employers are required to contribute to your superannuation investment fund, aka “super”. Starting from your first job, your employer puts some money into your super. After a few decades of working, you should have enough to enjoy your golden years. However, many people don’t manage their super. By the time they retire, they may have needed more growth to keep up with inflation, leaving them struggling to make ends meet.
The Hazards of Being “Hands Off”
For many Aussies, their super growth over the years doesn’t keep up with inflation, meaning their retirement income needs more to keep up with the cost of living. Worse, they may not realise the shortfall until they’re close to retiring—when it is too late to make any substantial changes.
It’s never too early to monitor your super contributions and growth. Your employers contribute to the government’s default investment, MySuper. MySuper, in turn, invests in simple, low-risk, low-fee funds. They aim for an overall portfolio of 70% in growth assets (real estate and shares) and 30% in lower-risk hedges against inflation—cash and bonds.
You contribute 10.5% of your ordinary income to your super every year. That is a significant sum, and you should proactively manage that money. According to the Productivity Commission, an underperforming super can cost you $375,000, or 36%, when you retire.
You have the authority to direct your super investments. However, there are other ways to maximise contributions and the ensuing income.
Consolidate your Superannuation Investment Accounts
You may have several super accounts if you have worked for multiple employers. Consolidating your super into one account can save you fees and make managing it easier. By comparing the costs and returns of each fund, you can find the one that aligns with your goals and transfer your balances. Once you’re 18, super contributions are mandatory, no matter your income. You can check all your super balances through the ATO website at myGov, then set to work consolidating them.
Why put them all together? It makes financial sense. For one thing, a small super is probably barely afloat after you pay the fees. Administrative fees are the dirty secret of the finance industry; $2.6 billion in wealth disappears yearly because of fees and excess insurance. Compare the fees and returns of your supers, and move everything to one that aligns the two with your goals.
Compound interest
If there’s a magic formula for growth, it’s compound interest. Compound interest is a powerful tool for super growth. Your interest is added to your account balance, creating a compounding effect that can significantly increase your retirement income. The more you contribute to your super, the greater the compound interest.
When your super earns interest income, that amount grows every year—even if you don’t contribute a dollar more. It’s interest on top of interest, and after decades of accumulation, it makes a tremendous difference in your income stream.
Supplemental Contributions
As mentioned, your employer contributes 10.5% of your regular income to your superannuation. Additionally, you can contribute more money from your pay through salary sacrifice. However, assessing your disposable income before putting extra money towards your super is essential. Salary sacrifice can potentially lower your taxable income. However, it’s best to consult a financial advisor before making decisions.
Personal contributions
If you prioritise building your savings, your superannuation may have been overlooked. However, if you still need to manage your retirement account effectively, you can transfer some of your savings into your super. Doing so can increase your compound interest accumulation, potentially increasing growth more than a standard savings account.
Superannuation Investment Options
The downside to taking control of your super investing is that you’re responsible for ensuring adequate growth. How you invest is predicated on where you are in your career. Gen Z, who are just entering the workforce, have more time to be aggressive and take chances. Baby boomers looking at retiring in a few years want to be more conservative and shift assets into low-risk bonds, blue chip shares, and cash. The range of investment options available is based on what your super fund offers on its investment menu.
Industry Funds
These are the workhorses of super funds. The fees are typically low, with a few no-nonsense choices. Unlike retail funds, these are owned by the shareholders and are non-profit—meaning that growth is shared among only the members of the funds.
- Defensive (inflation hedge): this investment strategy focuses on protecting the value of assets against inflation.
- Moderate: a moderate investment strategy typically involves a balanced mix of defensive and growth assets.
- Balanced: This strategy aims to maintain a healthy balance of defensive, growth, and income-generating assets.
- Growth: a growth investment strategy involves investing in assets with a higher potential for capital growth but also higher risk. These assets typically include shares and property.
- High Growth: a high-growth investment strategy involves investing in assets with the highest potential for capital growth but also the highest risk. It usually includes a higher allocation to shares and other high-risk assets.
Retail funds
These funds are owned and managed by a retail finance company. They make money from the fees they charge, typically a percentage of the investments. They offer more choices, including ASX share funds, than industry funds. Retail funds also offer super insurance so your retirement income is safe from adverse circumstances that may impact you or your spouse.
Other superannuation investment options
You can be creative in selecting your super investments beyond managed funds. If you are comfortable with more sophisticated investment instruments, you can put some capital into the following:
Managed accounts
MDAs, SMAs, and IMAs all fall under managed accounts, typically trusts. Investors have beneficial ownership of the account’s assets, regardless of whose name is on the asset’s title. This means that these investors have voting or transactional influence regarding the direction of a company. Account holders also receive all the income the investments generate. Cash, investment real estate, and term deposits are all reasonably conservative super options.
Final thoughts
Managing your superannuation investment is a crucial aspect of planning for your financial future. You can ensure a comfortable retirement income by consolidating your accounts, benefitting from compound interest, making additional contributions, and exploring investment options. It’s important to seek professional advice from a financial advisor to make informed decisions that align with your financial goals.
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