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A COMPREHENSIVE AND PURPOSEFUL GUIDE TO RETIREMENT A how-to for people who are too young, too busy and too broke to pay attention to superannuation
dirty word
, The S word
SUPERANNUATION Superannuation is a dirty word. It’s a pesky tax structure that takes 9.25% (soon to be 12%) of our wages and locks it away until it’s time for us to retire. For many of us who are in our 30’s and 40’s, that money would really come in handy right now. We’re planning for families or raising our children, and we’re trying to pay down our home loan and other expenses. It’s hard enough to get ahead as it is!
, de al So what s the way? with s,upe r any t? What s the poin
However, someday in the not so distant future, you are going to want to retire. For most of us, that day comes when we’re in our mid-60s, after 40 long years of working. But for the average person who retires at 65, that means 20 plus years of living the good life - running around after the grandkids, travelling the world and, enjoying time with family. Which begs the question, if you’re going to live and not work, how are you going to pay for your lifestyle? How are you going to afford to retire? Which is where super comes in. The super system puts the responsibility on you to save for retirement, but by making it compulsory, it actually forces you to make it a priority. This might seem annoying now, but in 20 or 30 years time, it will come in very handy. The real problem is that the amount of money that you’re forced to put into retirement savings now probably won’t be enough for you to live the comfortable retirement that you envision. So that’s why it’s important to have an idea of how you want to retire and then have a plan to help you get to where you want to be. That’s what this guide is all about.
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1. Do I know when I want to retire? 2. Do I know what kind of lifestyle I want in retirement? 3. Do I know how much income I’ll need in retirement? 4. Do I know if I’m on track? 5. Do I plan on: a) carrying on, living how I do now? b) downsizing and living more modestly? c) going all out and living my dream? 6. How much do I currently have in my super, other savings and assets? 7. Do I know where my super is, what it’s invested in and how it’s performing? 8. Am I willing to make changes today to improve my situation for the future? 9. Do I know what I can do to save more? 10. Do I know where I can go to find help and advice? 2
THE MILLION $ QUESTION
The average couple will need around a million bucks to retire right. That’s a lot of zeros and it doesn’t take overseas holidays, a new car and money for the kids and grandkids into account. A million dollars will give you a comfortable retirement, not a luxurious one, so that’s why starting early is absolutely vital. If you’re active with your super from when you’re young, you have a much better shot at being a million dollar retiree down the road.
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ACCEPTING THE IMPOSSIBLE So you’re probably thinking that there’s no way you can possibly save up a million bucks. But if you’re young and you start paying attention to your super, that goal might be easier to achieve than you think. When it comes to super, time is money, because you have the brilliant advantage of what’s called “compounding interest” on your side. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn’t... pays it.” What did our mate Al mean by that? Let’s look at an example.
$1,403,905
$1,500,000 $1,2 50,000
$616,729
$1,000,000
$252,115
$500,000 $2 50,000
$83,227
$100,000 25
30
35
40
45
50
TOR AGE OF INVES
55
60
IT $5,000 INIT IAL DE POS P.A. YEAR AT 8% OF $5,000 PER
INVE STMENT
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The graph on the left shows the difference between a person who starts saving when they are 25 and a person who starts saving when they are 55. These people are saving the same amount, but the person who puts in regular contributions over a longer period of time ends up with a much bigger lump sum - nearly $709,000 in this case. This isn’t rocket science - of course someone who starts saving earlier will end up with more money, right? Well that’s right, but it’s worth understanding why the compound effect is so important. Say you put $1,000 into a fund that returns 10%. After one year, you’ll earn $100 interest, making your total $1,100. If you reinvest the principal amount plus the interest, your next return isn’t $100, it’s $110. So you have $1,210 all up. In seven years, you will have doubled your money. So the compound effect is actually really powerful, it enables you to grow your money simply by letting it hang out over time.
So how t he he ck are you going t o do t hat?
Let’s start by figuring out the lump sum you need to aim for. This is the total amount of money you’ll need for the 20 odd years that you’ll be in retirement. There is a fancy industry term called an “income replacement rate” which is the percentage of your current annual salary that you’ll aim to live on after you retire. The sweet spot for singles is 70%, and for couples it’s 55% of their combined income. For simplicity, let’s look at a single person who earns an average salary of $60,000 per year. Assuming that person’s lump sum will earn 5% in retirement, we can assume that they’ll need $840,000 for their time in retirement. $60,000 x 70% = $42,000 x 20 years in retirement = $840,000
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WHAT’S THE DEAL WITH SUPER FUNDS? There are five types of super funds out there, and chances are that you have one or more accounts in them. They are called: retail, industry, corporate, defined benefit and self managed super funds (SMSF’s).
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RETAIL These are the funds run by big bank owned companies like BT, AXA and AMP. They have about half of our $1.5 trillion dollar super pool. Retail funds have the most investment options and they often have the highest fees.
INDUSTRY
Most Popular
These funds are targeted to certain industries (hence the name) but they are also open to the public. About 20 per cent of accounts are held in industry funds and while they generally have fewer investment options than retail funds, they also have lower fees.
CORPORATE These funds are run by large organisations and they have the same options as retail funds but with lower fees. However, they are only accessible if you’re an employee of an organisation with a corporate fund.
DEFINED BENEFIT These are the old government employee pension funds that paid defined benefits to workers, giving them a set income for life based on their time in employment. These are rare these days.
SMSF SMSF’s have no more than four members, who are also the trustees. They are usually set up by business owners and professionals who have a super balance of $250,000 or more. SMSF’s hold one third of all super. 7
INVESTMENTS ARE LIKE ICE CREAM
Not everyone has the same appetite for risk, which is why the super industry has developed three options to cater to people and their attitudes towards risk and reward. These options are: growth, balanced and conservative.
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GROWTH
BALANCED
This option has about 80% invested in shares and property with the remaining 20% in assets like cash and bonds. Because the growth option tends to be more volatile, it generally suits younger investors who have time to ride out dips and dives in the market. If fund options were ice cream flavours, growth would be Rocky Road.
With this option you’ll find a mixed bag that still has 60%-70% in growth assets like shares and property but with a larger proportion of cash and bonds. Over time, balanced funds produce moderate returns with moderate volatility. It’s a Cookies n Cream option, a measured mix of growth and conservative assets.
CONSERVATIVE
MIX AND MATCH
This option is the opposite of growth as it has 60% - 70% in bonds and cash, and 30% - 40% in property and shares. Most people who are approaching retirement look transition into this option because they no longer have the time to ride out the ebbs and flows of the market. This option is like good old Vanilla!
Retail and SMSF funds will generally enable you to invest in specific sectors, direct shares, term deposits and some of the more complex investment options. This is usually not available through industry funds, and is for those of us who want a scoop of everything, and like to make our own! 9
PERFORMANCEAnxie ty There is still a lot of chatter about the dismal performance of super funds. But for those of us who are still young and have plenty of time until we retire, there is no reason to panic. Like every investment, there are highs and lows, which is why paying attention to the performance of your super fund is important. Most of us feel pretty powerless when it comes to our returns, but there are plenty of things you can do to boost the performance of your super savings. Here are three quick tips:
Pay attention! The difference between something as small as a 1% return can make a huge difference. Let’s look at an example. David is 35 and he has $50,000 in savings. Over the next 30 years, he’ll contribute $400 per month. If David earns 5% interest, he’ll end up with $556,000. If he earns 6% interest, he’ll have $703,000! That’s a $147,000 difference for just 1%. Don’t base your investment decisions on what is happening in the market now. Super was designed to perform over time, so when looking at fund performance, look at the one, three and five year returns. Don’t make decisions based on the latest super fund rankings. Don’t buy at peaks and sell at troughs. People do this all the time, they see a hot option and they go for it, and then when something isn’t performing well, they dump it. It’s a good idea to get a bit comfortable with volatility. Believe it or not, it’s actually a good thing! In growth assets, price rises usually occur more often than price drops, so over time you’ll end up with a better result. 10
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FORGET ABOUT THE PRICE According to the Australian Taxation Office (ATO), there are 3.4 million unclaimed super accounts in Australia, so there is a darn good chance one (or more) of them is yours. If you have lost super, it doesn’t just mean that your hard-earned is out there floating in the infinite abyss, it means you’re also paying fees on it! So sort yourself out. The ATO has a tool called SuperSeeker, which will let you search for your lost super online just by entering your tax file number. You can’t get around paying fees for your super fund, but you can look to reduce them so you end up with more in your pocket. So where should you start? 12
TAG... The investment industry has a measure called the Management Expense Ratio (MER), and it’s expressed as a percentage charged on the total balance of your super account (they range from 0.6% - 2.2%). Don’t select a fund on costs alone, but know that even a small savings on fees can make a big difference. Remember David and the difference the 1% made on his earnings? The same rule applies here. On a $100,000 balance, the difference between 1% and 2% in fees is $1,000 in a single year! So pay attention to fees – small amounts are a big deal in super.
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THE BIG PICTURE Building your retirement honey pot isn’t easy; it takes discipline, commitment and the right advice to get you to where you want to be. So take a look at your big picture. What do you want for yourself in the 20 plus years that you’ll be in retirement? Will you own your own home, debt-free? Will you want to travel regularly? What kind of stuff will you want to do for fun? Having a plan can make saving for retirement a bit easier because once you know what you’re saving for, you’ll be able to figure out how much you’ll need to get there.
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And if you need some advice along the way, there are people who can help you, and for a lot less money than you think. Sometimes we all need a wake-up call to let us know that our future is important. Remember, super is your bloody money! Starting today when you are young makes it a heck of a lot easier too. So set a goal, start your planning, and get some advice if you need it. Remember, you’re not alone out there, but you might need to get the conversation started. Once you do, you’re on your way.
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SOME SUPER HELP! ybr.com.au/super Super info and retirement calculators superfuture.gov.au Super laws and regulations moneysmart.gov.au Super and retirement tips and calculators superannuation.asn.au The Association of Superannuation Funds of Australia ato.gov.au Super tax information superratings.com.au Super research and ratings fpa.asn.au Financial Planning Association of Australia
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Disclaimer The information in this document has been prepared by Yellow Brick Road Holdings Limited ACN 119 436 083. It is general information only and is not intended to provide you with financial advice. The information has not been prepared taking into account your specific objectives, financial situation, or needs. All examples are illustrations only and results will vary as assumptions change. Before acting on any information in this document, you should consider its appropriateness to you, and seek independent financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. We have endeavoured to utilise facts, figures and statistics from independent third party organisations (e.g The Australian Bureau of Statistics and the Association of Superannuation Funds of Australia and the Australian Government Department of Human Services). Information is accurate at time of publication (July 2013).