Checking if your superannuation is appropriately invested for you.

Finance & Fury Podcast

Welcome to Finance and Fury. Today we’ll look at how to get the right investments in super.

Because super funds take care of it for people – a lot of people don’t pay attention – so in this episode want to explain what to look for and how to help determine if your investments in super are appropriate –

Not advice – seek advice if you are unsure

What is super?

1. Most people think of superannuation as just something your employer pay in to so that when you turn 60 you can access it.
   9. Even though your employer pays into super, that is your money! 9.5% on average
2. don’t care and why would you right? out of sight, out of mind and decades away from becoming relevant.
3. Technically – superannuation is just a vehicle for investments that are held in a concessionally taxed environment
   1. Like having an investment account that pays only a 15% tax rate on income when compared to your marginal tax rate
   2. The only downside – is the preservation rules – where you can access it if you desperately need the funds

There are different types of accounts that allow access to different investment options

1. Super is a vehicle to invest funds for retirement – A car is a vehicle
   1. You can get a Mazda, or Mercedes but the aim is to get you from point a to b!
   2. Like cars there are different types of super accounts with different features
   3. What are your options:
2. Retail –

• A Master Trust is a superannuation fund in which a large number of members deposit their money.
  • The trustee of the Master Trust pools the money together and purchases interests in the underlying investments, typically managed funds.
  • The value of the investments of each member incorporates the fees, franking credits and some taxes from the underlying investments.
• WRAP account – External super trustee but you have control over investment decisions
  • You get a cash account
  • Then you select third party investments – Managed funds, Direct Shares, LICs, ETFs

3. Industry
   • Industry super funds are multi-employer funds (employer associations and unions).
   • Investments - limited to around 10 multi-sector investment options (eg. Growth, Conservative, Balanced) – as well as single sector investments – in an asset class
4. Regardless of the type of account that you have - The real cost of super is opportunity cost – doing nothing now will hurt long term -
   1. Any problem ignored long enough will grow – until it is too late
   2. Pay attention and make it work – don’t regret the future
5. That is why setting up the correct investments and paying at least some attention is very important
   1. Again – the core concept for investments in super is that it is a Tax effective investment account – if you are investing for the long term, why not use?
   2. Comparison - Same investment of 10% p.a.: Compounding returns of 8.5% p.a. vs 6.1% p.a.
   3. $20,000 over 30 years = $231k vs $118k – or almost double the money

Superannuation investments-

1. Will be looking at the industry fund sector – what most people have and have covered WRAP accounts in another episodes: “What types of superannuation accounts allow you to control your investments?”
2. Industry super funds –
   1. Not a lot of transparency but it is getting better – so it can be hard to actually know where the funds are invested –
      1. For shares – there is transparency – other investments like property, infrastructure, alternatives – harder to know
   2. Investments - Depends on account.
      1. Mostly - Premix – Conservative to high growth –
         1. Based around the asset classes that are invested in – cash, FI, property, infrastructure, shares, alternatives
         2. How much to each asset class will determine the classification – 100-90% to growth – probably the most growth pre-mixed option the super funds have
      2. The default used to be Balanced – but for someone who has 30+ years of investments ahead = might not be correct.
      3. normally a lifecycle strategy – as per your age and account balance
         1. Below the age of 40 – you might be in a higher growth investment – then after 40 they start to scale you back –
         2. This might not be appropriate – you might be in your 40s and still want to be a higher growth investor
      4. Also – most have single asset class investment options – shares, bonds, property, etc.
      5. These can be used to help beef up or reduce the allocation to asset classes
         1. Example – if the pre-mixed options don’t have enough growth – then you can select some additional share allocations – say 80% to their growth option and then 20% split between Aus and Int shares
      6. Considerations when determining the right investments for super -
         1. Time horizons and goals based investing – investing is a long-term game – super can be even longer – due to the preservation rules –
            1. The longer the time frame – the longer you have to recover from any volatility losses
         2. Hence - Time in the market becomes a thing– the longer you have the funds invested, the greater your long term returns could be –
            1. Trying to guess markets and switch from high growth to cash and back again can result in lower long term returns – so keeping your super appropriately invested based around your goals in important -
         3. Super contributions - Higher levels of volatility can be good for regular conts
            1. If your super isn’t getting any contributions – may be better to have slightly less volatility –
            2. Regular investments with high level of volatility can help you buy additional investments when funds prices are low
         4. Combining all factors makes for a strong performance – the bedrock is the returns from the investment
      7. How to make the decision –
         1. Compare how industry funds invest money now –
            1. But checking on the growth to defensive ratios is the first step
         2. Would help to go onto your funds website and see how they have invested your funds – double check that you are in an option that might be appropriate for you
         3. Can see how much the investment ranges on the asset classes – the funds normally have their investment objectives and risk metrics
            1. Investment objectives - + a percentage above the cash rate or inflation
            2. Risk – volatility levels and time frames to be invested for
         4. Remember – your goals and objectives could be different – you might have a Long term focus –
      8. Allocations can likely changes over time – if you are in your 50s to 60s – probably better to have less volatility approaching retirement

4. Other considerations - Check your costs – Some accounts are higher than others – but it depends on what you get for what you pay
   1. Admin fees: Flat fees and percentage fees – For flat fees – some accounts have $0 and some have a Standard is about $78 which is good for lower balances
      1. One I am with is $175, but worth it. Any managed fund I want, any direct share (Aus or Int)
      2. You can have no flat fee – but % admin fees – these do range as well 0.1% to 0.16% -

• These are for industry funds – pretty standard -

1. Where these is a variation - Investment fees (MER/ICR) – these can be hidden
   1. The higher the MER – the lower the net returns depending on investment strategy
   2. But the higher the MER – the greater the potential returns –

• Higher growth have higher MERs in general – looking at a few options – you can have MERs of 0.35% or 0.8% - but this is the difference between a conservative option that has mostly cash (which has a low to no IRC/MER fee) – So whilst the MER is much lower for conservative – the long term returns can be a few percentage points lower even at the lower costs

1. Where it can matter is between platforms - if two funds invest identically – but one has a 0.5% versus a 1% ICR/MER – then that is what can lower your returns potentials - Don’t get caught out
2. Focus shouldn’t just be on the percentage costs but what you get for your money

What to do to make sure you make the most out of it?

1. Pay attention – get the right investments
   1. Cars: You can have a Ferrari but if the driver (investments inside the account) is awful, the car may crash! Not getting to point B!
2. Make sure your contributions are going in there
3. Treat it like your own, cause it is – If you think you don’t have any investments, well you do in your super
4. Check out the websites for super funds – look at the investment options
5. Check out that you have a good investment compared to what your goals are

Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/