A recent article published in The Sydney Morning Herald (12 October 2017) was startlingly entitled “Counting on your super to fund your retirement? Don’t.”
Now, anybody who read that headline would be well within their rights to be alarmed. After all, isn’t the whole idea of super essentially to fund our retirements? The article made some interesting points but also made some questionable assertions. What it did bring home, unintentionally perhaps, is the importance of being intimately acquainted with your super. More on that later.
As a nation, due to mandatory super contributions, we punch well above our weight in investment circles – as the article says “Australians make up barely 0.3% of the world’s population yet hold $2.1 trillion in pension savings – the world’s fourth-largest such pool”. With all that pooled wealth, you’d expect that our retirements would be looking rosy, right? Unfortunately, many people holding super accounts seem to have adopted the old-school Ocker attitude “she’ll be right”. Super is viewed as money that largely can’t be accessed until retirement age so there’s no point in paying it too much attention.
That lack of intimacy has manifested in 1.4 million Australians having their retirement savings languishing in what The Financial Services Council (“FSC”) describes as “subscale” default superannuation funds. The FSC estimates this can leave some consumers with a $70,000 shortfall at retirement as a result of being invested in underperforming funds. The obvious question is, how can this situation arise? There are two main ways:
- Workers who don’t choose a fund or an investment option in a fund are automatically put into a fund which their employer has in one way or another chosen – hence “default”;
- Product issuers constantly review and tweak their offerings in response to competition and legislation, closing existing funds to new applicants and investing new monies into new, improved funds. Unless members choose to rollover into a new fund, they are left in their existing one, the size of which, by natural attrition diminishes over time and faces increasing costs to maintain.
Overlay that with many people having multiple super funds and the cost of that lack of intimacy really starts to climb.
Some readers may be thinking this doesn’t apply to them because they have an SMSF. Sorry, but that lack of intimacy can apply here too. Investment options that aren’t reviewed regularly can languish whether they are industry funds, retail funds or SMSFs.
We ask our clients “who do you want to be responsible for funding your retirement – you or the Government?” So, counting on super to fund your retirement? Do – the alternative is unthinkable.