Last month we explored some of the basics of what Super is, what it does or, more specifically, what it’s supposed to do. As we discovered, its core purpose is to help fund your retirement. Now that may sound pretty obvious but take a moment to think about what that actually means. Your standard of living in retirement depends on your Super Fund, so can you see how important is it to understand how your Super is growing?
Taking that thought one step further, you may have heard a lot of noise in the media at the moment about the idea of accessing superannuation early, as a deposit, to assist with the housing affordability problem.
Allowing access to Superannuation for a property deposit would not solve the affordability challenge and could actually undermine the real purpose of Superannuation. The issue facing Australia is that our aging population will result in lower Tax revenue for the Government of the day and as a consequence there will be a reduction in the assistance available to those who cannot fund their own retirement. Managing Superannuation and getting the right advice becomes even more important to Australians in general.
Unfortunately, the truth is we are a nation of poor savers because we have become a nation of consumers. This simple fact is distracting us from the basic fundamentals of saving which underpins the foundation of a property purchase. I believe that there is an entire generation out there that has given up on this goal rather than finding a way through the problem by foregoing lifestyle choices.
Allowing access to Superannuation as a substitute for savings does nothing to change habits and choices. Superannuation itself is a result of working, not saving.
In fact, a rush of money from Superannuation into the short-term deposit money system, or M3 as it is known, would only drive property prices higher. If you have come to our educational events in the past you would have learned that Money Supply drives prices up.
Put another way, increased money supply creates more buyers who fuel demand and this demand increases prices.
As a nation of consumers we have high expectations, wanting the best of all worlds and we don’t like waiting. From our point of view, there is no affordability issue; it just comes down to choices. We wrote an article about this a few months ago
Just by looking at our behaviour, it’s plain to see we love our toys and aren’t afraid to use the equity in our homes to buy them. It seems to me that Thrift is a forgotten word in the Australian vocabulary.
Former Prime Minister Paul Keating, who introduced the superannuation savings system said recently that allowing Super to finance housing purchases would be a “super bad idea”.
So, if it’s not a purse you can dip into to pay your monthly cash shortfall or a deposit for your dream home, what is super?
When it is all said and done, Superannuation is your money for your retirement, plain and simple, nothing else.
So by extension, you must understand what you want it to do and by when. For example, what amount of money do you need in Super to provide an income in retirement – have you ever tried to work that number out?
Ask yourself, how is my Super invested, is it in line with your goals and in line with your investment preferences? Do you, or more importantly, can you do it yourself and what benefit would this be to you?
The first step to really understand what super is for, is to start with the end in mind. That’s your retirement of course, looking at how long you have left in your working life and calculating what you need. A qualified financial planner is empowered by you to answer these important questions through various scenarios to help determine your advice strategy, click here if you want to learn more
The next step is to be clear on where you are starting from. You may recall, last month, I asked you to have your super statements ready. Let’s cover off some of the basics by having a look at those statements now.
The first thing to note is what time period the Statement covers. Is it an annual report, a Bi Annual update or something more regular? It might not seem important but the details provided on each will be different. Typically, an annual report will provide much more information than a monthly summary.
By the way, you should be aware that the statement format will be different from each Provider. The basics will be the same but there may be some differences in how it is laid out and what order the information is presented. If you have more than one fund you can compare the statements to see what I mean.
In our example of what to look for, we’ll use an annual report.
Investment balance – This amount is the balance of your superannuation account or more specifically, the amount that has been contributed from your employer plus the earnings from the fund. Some statements will show the balance plus a summary of transactions over the statement period. If not then this information will appear in the Transaction history section. Please do not confuse your Death Benefit with your balance. The Death Benefit is Insurance and will be shown in greater detail in the Insurance section of your statement.
Investment profile – Usually, without any other selection being made, you will be placed into a default profile position based on your age bracket. This would mean you would most likely end up with an even spread over all the asset classes, normally known as Balanced. Have a look at what your statement shows. Is this the most accurate investment profile for you right now?
Asset allocation – Simply put, this is what asset classes you are currently invested in. Have a look at what your statement shows. Are you comfortable with the way your money is allocated? Were you aware that you may be invested in certain classes that you may not want to be invested in? How do you know if this mix gets you to where you need to be over the course of your working life? As you can probably tell, advice in this area is very important to you.
Transaction history – This is a list of all the transactions that have taken place during the timeframe covered by the statement. It will include all of the Employer contributions received by the Fund as well as any Salary sacrifice amounts. There will usually be deductions such as Tax, Administration fees and insurance fees. The most important thing to look at in this section is the opening balance and the closing balance. There has to be an increase in the balance. If there isn’t alarm bells should be ringing.
Insurance – Your statement should detail what insurances you have through your Super. Most likely there will be Death Cover, Total & Permanent Disablement Cover and possibly Income Protection if you have that as part of your Policy. It’s important to check what you are covered for and if it is still relevant to your situation. Remember, just because you have insurance in Super doesn’t mean you are adequately covered.
Next month we’ll look at the changes coming to Superannuation from July 1 and how to prepare for them.
In the meantime I suggest you check out ID Super, the Super Fund for property Investors. I think you’ll like what you see.