Yesterday, AMP chief executive Craig Meller addressed a CEDA (Committee for Economic Development of Australia) breakfast in Sydney.
According to Mr Meller, ‘We need to take action now to counter what is the most predictable threat to our prosperity over the next 20 to 30 years … and the simple reality is that saving just 9.5 per cent of your earnings is not enough.’
Not enough savings and a shrinking ratio of workers (tax payers) to retirees (tax receivers) threatens our nation’s future prosperity.
Mr Meller says: ‘We only have four options: save more, tax more, work longer or be poorer.’
Save more and work longer are the responsible choices to the challenge of accruing sufficient capital to fund a retirement that could last well into your 90s.
But just how much is enough capital?
The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard estimates you require nine to ten times your final salary to fund a ‘comfortable retirement’- for what it’s worth I think the multiple is closer to 15 to 20 times.
Apparently, the average superannuation balance for a 60‒64 year old is around $77,000.
Unless your final salary is $8000, it’s fair to say $77,000 is a long way short of the ‘comfortable retirement’ calculation.
The harsh reality is most people will not accrue sufficient funds for an independent retirement. Travel, mortgage payments, school fees, uni fees, insurances and just living, all leave precious little for additional savings.
Obviously, their Plan B is to rely on future governments honouring the social contract to pay an age pension. Expecting the next 40 years to be the same as the last 40 years is a brave choice (either consciously or subconsciously).
For those who consciously choose to save more and work longer, the other option available is to take control of your superannuation and seek to improve the investment performance and lower the fees.
You do have a choice when it comes to superannuation.
Unfortunately, the majority do not exercise this choice. According to industry studies, about 80% of people invest in their providers’ default option. From experience, I can tell you that whenever superannuation is mentioned, most people shrug their shoulders and follow the herd.
Prior to 1 January 2014, the default option was the Balanced Fund (more on this shortly).
After 1 January 2014, the government’s Stronger Super initiative requires employers to pay contributions for their employees, who haven’t made a choice of fund, to a super fund that offers the MySuper product.
MySuper (according to the government’s website) was introduced ‘to give consumers access to simple, low-fee super products that would allow them to more easily compare funds.’
In addition to lower fees, MySuper offers a lifecycle investment option and/or a single diversified investment option. The lifecycle investment option is a change to the previous default option, the ‘set and forget’ balanced fund.
The following table from the ASIC Moneysmart website shows how the lifecycle investment mix of growth assets (shares, property, hedge funds, infrastructure) and defensive assets (fixed interest and cash) alters over a member’s lifetime.
In theory, this sliding scale investment approach has merit. The reality is, on a case by case basis, it could be a winner or a loser.
For those members invested prior to 1 January 2014, it’s a fair bet they have largely remained with the standard balanced fund.
The following Strategic Asset Allocation chart is from the Australian super balanced fund (this is indicative of most balanced options):
The current mix between growth and defensive assets is 90/10. According to the Lifecycle Investment Strategy, this mix is suitable if you’re under 45, but a little too spicy if you are over 55.
The ‘good news’ for those members over 55 still in the old default option is that by 1 July 2017, your super fund must transfer your balance into a MySuper account. After July 2017, those Australians not overly interested in their retirement capital are all going to be peddling away on the lifecycle. It could be a very long ride for some.
The potential problem with the lifecycle approach is the asset mix alters based on your age and not market conditions.
If, for example, you turned 55 in March 2009 (the GFC low point in the market), the lifecycle model switches 20% of your beaten down growth assets into defensive assets. Selling at the bottom of the market is not an astute investment strategy.
Alternatively, say you turned 55 in November 2007 (the peak of the Australian share market). This would have been an excellent time to underweight your equity exposure.
It is for this reason I say, ‘on a case by case’ basis, the lifecycle strategy could be a winner or a loser.
Relying on your birthdate to decide your retirement outcome is to me not an acceptable option.
The reason you are reading The Daily Reckoning, I assume, is because you are not like the majority. You are interested in how to manage your money in a manner that is compatible with your risk profile, investment objectives and individual lifecycle.
The following table from the Association of Superannuation Funds of Australia (ASFA) superannuation statistics report from August 2014 shows where Australians have their superannuation monies.
Your money is in one or more of these boxes.
The box with the biggest amount is ‘Funds with less than 5 members’ — that is,self managed superannuation funds (SMSFs).
Retail (AMP, MLC, BT, Colonial First State, etc.) and Industry funds are the next largest repositories for retirement savings.
Michael Costa (former NSW Treasurer and prominent Labor Party figure) didn’t win any friends in the fund industry when he made these comments recently on Channel Ten’s The Bolt Report (emphasis mine):
‘There’s billions of dollars in these [industry] funds and they are badly managed in terms of corporate governance…I think there needs to be legislation coming out of this Royal Commission [into union corruption] to deal with that. The rorts that are going on in there are horrific and they need to be dealt with.’
If Costa’s comment regarding ‘horrific’ rorting within industry funds is correct, then member ignorance on how their money is invested has bred management contempt.
In the face of high fees (as per the Murray report), mediocre performance by some managers and the suspicion of contempt/rorting, it’s little wonder members have voted with their feet and established their SMSFs.
SMSFs (funds with less than 5 members) are the biggest slice of the $1.8 trillion superannuation pie.
And according to ATO Assistant Commissioner Stuart Forsyth, that slice is set to become even bigger.
Forsyth told a recent Chartered Accountants conference that (emphasis mine) ‘SMSFs are here to stay… We can see one million SMSFs, down the track.’
Retail and Industry funds know they are in for one hell of a battle to retain their members with larger balances.
The SMSF business has become very competitive. Most people used to believe you needed at least $250,000 to establish a SMSF.
A quick look at this site shows this is no longer the case.
The SMSF review site (for the record, I have no affiliation with the site) gives a comparison of the establishment and ongoing costs offered by a range of SMSF providers.
A couple of the providers offer to establish a SMSF for no cost on the proviso you sign up for at least two years of administration services (around $700 per annum). I have no idea whether these providers are competent or not, so please note this is not a recommendation to use their services.
The point I’m making is that at a cost of $700 per annum, members with $70,000 (or a couple with $35,000 each) can consider the merits of establishing an SMSF.
Thanks to the marvels of technology, taking control of your financial destiny is becoming a more affordable and viable option.
Tomorrow, we’ll look at whether a SMSF is suitable for you or whether you should remain with your existing public offer fund (and take a more active role in the asset allocation).
For The Daily Reckoning Australia