It’s a simple question but what do you really know about Super? This month we’ll explore a little about what Super is, what it does or, more specifically, what it’s supposed to do and finally how being a property investor affects the way you think about your super.
Superannuation is a Government mandated program for people to have money available at retirement. The benefit for the Government is less reliance on a pension scheme funded through taxpayer dollars. That means that the burden on future generations should reduce as more and more people have Superannuation to turn to when they retire. In theory the demand for Government assistance should drop over time.
Superannuation then, can be best described as money set aside from your income by your employer and paid into an industry superfund of your choice. These amounts are called Superannuation Guarantee Contributions and are deducted at a rate mandated by the Government, currently 9.5%. The accumulated money is invested by the Fund with the aim to increase its holdings for the benefit of its members. The Superannuation being accumulated in your name is not accessible until you retire. Obviously, the longer you work, the more money you will contribute and the more you will have. The Fund itself will invest the money for you, as well as for all the other members, hopefully growing the balance along the way so there is a nice tidy sum available for you at retirement. Given how long most people will work for, it makes sense that you have some idea of the methods used to invest your hard earned money. After all, it’s in your best interest to know about this stuff, don’t you think?
So, what exactly do you know about your Superannuation Fund? Do you take an interest in your super? Aside from perhaps casually looking at the statements you get and making a mental note of the balance, have you ever looked deeper into how the Fund uses your money or even what it is invested in? Do you know what returns you are getting and are they comparable to other funds?
Are you invested in line with current market trends as we outlined in last month’s Newsletter? More importantly, is your super invested in line with your property strategy?
You see, it may seem obvious, but there is a difference between property investors and investors who put their money into paper based assets. Property investors favour bricks and mortar for the stability and long term capital returns that have been experienced over many decades. Property investors also derive satisfaction from the knowledge they are making a contribution to society by helping others to have a home to live in.
Contrary to popular opinion, Property Investment and Superannuation are very similar in the result they are trying to achieve. With Super you put money away (contribute) on a regular basis over time until you have access to a passive income source (asset) at retirement. With Property you start with a negative position (borrowed money) then you pay off the debt (contribute) on a regular basis to get a passive income producing source (asset) at the end. You contribute to both, one in employer contributions from your income, the other through the form of contractual loan repayments. You can see that both achieve the same objective of having an income producing asset. The difference is that investing in property is voluntary.
Super, by its very nature is a sensitive subject for a lot of people. There was enormous controversy when lending for residential property through Self-Managed Super Funds was finally allowed. Despite that, Self-Managed Super Funds are one of the fastest growing financial products over the past few years, demonstrating the preference many people have for taking control of their retirement funds. Of course there is always going to be some risk involved in allowing someone to invest their own superannuation, so strict guidelines are in place to minimize that risk. Interestingly, while there are a complex set of regulations around SMSF borrowing, anyone can decide to invest their SMSF money into a share portfolio and arrange a margin loan for further leveraging power with no questions asked. Makes you wonder doesn’t it when so many investors lost considerable wealth post GFC and margin loans can be a dangerous device when markets spiral down out of control!
Managed funds are a mystery to most people. Investing in paper based assets invariably means a loss of control and more importantly transparency of where the money is being invested thus one loses the objectivity of the investment, a key point when running your own super fund. Ideally, you want to be in full understanding of why your investment performed the way it did, regardless of a positive or negative result.
For property investors this is not something they are necessarily comfortable with. So Super can unintentionally become a secondary or unaligned component to fit into their overall goals. However, that doesn’t have to be the case. In fact Super can be combined with Property to provide wide ranging means to achieve your financial goals and set your future lifestyle.
We’ll discuss this aspect further in next month’s newsletter, stay tuned and have your super statement ready to complete our exercise!