The main purpose of starting this newsletter over 20 years ago was to correct the myths that are often put about by the media. And never has it been more needed than the last couple of weeks, when the government announced a freeze on the increase in employer compulsory superannuation. The papers carried the predictable stories about how people would be affected, with one even going so far as to find a 26 year old on $80,000 a year who consequently would have $28,000 less in superannuation when she retired.
Not one mentioned the critical issue that time and rate were the principal factors that would decide how much your portfolio could grow.
Suppose a person invested $1000 a month toward their retirement. If they started at 25 they would have $6.3 million at age 65 if they could achieve 10% per annum. However, the final sum would be just $2 million if they only achieved 6% per annum.
If a person waited until they were 45 to start the program, and still managed to invest $1000 a month, they may have $760,000 at 10%, and $462,000 at 6%. Because the term is much shorter, the lower earning rate does not have such a dramatic effect.
The importance of getting the best return on your superannuation is particularly important now that employer contributions are not going to increase as quickly as originally planned. Just keep in mind that the decrease in the planned employer contribution is trivial in the scheme of things. For a person earning $80,000 a year the net employer contribution after the 15% entry tax would be $6460 at 9.5% of salary, and $8160 at 12% of salary. The difference is just $1700 a year.
Think about a person aged 30 who is on $80,000 a year now, and who has $20,000 in super. Let’s assume their wages increase by 4% per annum, and the employer contribution stays at 9.5% of their salary. If their fund earned 9% they would have $2.63 million at age 65, and $1.4 million if they achieved just 6%. On a balance of $2.63 million, an earning rate of 9% would be $236,000 a year. This is because they have reached the stage where the earnings are so big that the contributions don’t matter any more.
Now increase the time a little bit. Think about where the same person would be at age 70. Their superannuation would be worth $4.2 million at 9% and $2.1 million at 6%.
As I said before, it’s time and rate.
I regularly receive emails from young people whose superannuation is all in the capital stable or balanced area. This is totally inappropriate for anybody under 50. To make matters worse, the majority of self managed super funds have no exposure to international funds at all. Obviously the trustees have never bothered to check out funds like Magellan (Global Fund) and Platinum (International Fund). Over the last three years they have returned 23.5% pa and 16.4% pa respectively (after fees).
A major finding of the Cooper enquiry into superannuation was that 80% of Australians were “disengaged with their super”. If you find yourself in that 80%, my advice to you is start to get engaged. You’ve just seen how a small difference in the rate of return can make a huge difference to the amount you will have when you retire.
A report released today pointed out that 42% of Australians don’t even read their annual superannuation statement! And these will be the ones who will be complaining when they retire about the inadequacy of welfare.