When you first start out in the workforce, superannuation doesn't seem particularly important. It's something that only affects you at retirement age - which isn't something the average twenty-something likes to think about. Fortunately, preparing for this far-off future doesn't take much time or wherewithal - and the benefits can be significant.
Have you noticed that the world has changed, young people have changed, yet superannuation hasn’t? I have. In fact, super piqued my interest after I changed jobs a few years back. I realised that I hadn’t been as diligent as I should with my super, and there was the possibility I had multiple funds with multiple life insurance policies, and that I was paying multiple sets of fees.
I was also curious about where my super was being invested - not just my asset allocation but what equities I was gaining exposure to. If I have to invest 9.5 per cent of my salary I want to make sure that my super is being invested so that I have enough money for retirement. Unfortunately, there was a lack of transparency and easily digestible information in the market.
There are certain pieces of knowledge that are assumed within the Super industry, especially considering Super as we know it has existed since the early '90s. I think that super should be accessible and approachable. So I’m endeavoring to shed a little light on some of the basics of Super.
This is quite possibly the most important thing you can do for your super. A recent Productivity Commission Report revealed that 40 per cent of workers have more than one superannuation account. This means that many people have multiple life insurance policies and multiple sets of administrative fees. These combined administration fees and insurance premiums amount to $150 million AUD for every 500,000 to 600,000 duplicated accounts.
Consolidation is the process of bringing all your super money together under one fund. This is one of the easiest and most important steps you can take to save yourself from paying unnecessary administration fees. The government's MoneySmart site provides a simply explainer on how to put your super into one fund.
Asset Allocation and Risk profile
Superannuation is a savings and an investment product. This means your super is a vehicle for holding assets, and it is these underlying assets that impact on what the returns are, and ultimately what your eventual retirement savings are.
This is why it is important that when you choose a super fund and an investment option, you consider the weightings of the different underlying assets, and what these assets are.
Generally, your super will be invested in cash, fixed interest, property and shares. Cash, fixed interest and property are traditionally a more conservative asset class and a higher weighting of these is generally for those who have a lower risk profile (e.g. those who may be closer to their retirement and want to maintain the current balance of their retirement pool.)
For those who have a longer investment horizon, they’re probably wanting to look at a higher weighting of shares in their superannuation. Shares are a good growth asset class because if you keep money in cash you may not keep pace with inflation and you have less purchasing power. Shares have the potential to earn the highest return over the long term but are also considered a high risk investment.
On average, 23 per cent of Australian super funds assets are Australian shares, which at first glance, particularly in light of what we’ve just said about shares, might seem like a good thing. However, not all shares are created equal: particularly when we look at the Australian share market.
Financials, materials and real estate make up 61.1 per cent of the S&P/ASX 200. So, while it may look as though investing in Australian shares is investing in growth, there is a bit of double dipping going on by investing heavily in Australian shares.
Australia is less than 3 per cent of the MSCI world Index, yet 23 per cent of your super. Why are we investing 23 per cent of our Super into Australia which is only a small part of the global economy?
Looking into these questions is important. As a young person you won’t be able to access your superannuation for another 30-40 years. This means you’ll have a longer investment horizon, in which case you want to be invested in something that will provide you with the best returns over a long period of time.
Head to ASIC's MoneySmart for a suer-friendly overview of super investment options. Good luck!
Paul Bennetts is the CEO and co-founder of the Millennial super fund Spaceship.