Retirement | Slack Investor

Retirement sweet spot – a place to live is a good start!

Slack Investor has thought a lot about retirement – a lot!

Even though I liked most aspects of my jobs, the thought of doing what I want each day was most appealing. I read quite a few blogs on financial independence and they seem to fall into two main types. The “retire at 30” types and the “building of financial skills to gradually gain financial independence” types. Slack Investor is definitely in the latter camp and, without outside help, or big slabs of luck, I can’t really see a way of avoiding the 25-35 years of work to build up your funds before you then launch your retirement.

This post sets out with two of the building blocks to retirement – a home and some superannuation. You might be just starting your working life, or be in your forties and thinking … “Well, how do I get to my retirement from here?”

The recent Australian government Retirement Income Review emphasised that if your are renting in retirement then things are tough.

In retirement, renters have higher levels of financial stress. A significant proportion of retiree households that rent are in income poverty …”
The Australian Treasury Retirement income Review (2019)

Get a Roof

So take the advice of Flo Rida and Slack Investor and make it a big priority in your life to own a place to live. I know this seems like an impossibility to many as the cost of houses in Australia is eye -watering in the big cities. However, the place you want to own might be an apartment or, it doesn’t have to be in a capital city – it can be in one of the many fantastic regional towns!

From Australia’s most liveable regional cities. Not sure why “Distance to Alcohol” is a criteria – or what it means … might be good … might be bad!- but this is a nice selection of great Australian towns.

When you have found a place that you could retire to, the next step is to get yourself into the property market by saving for a deposit and buying a place. There will now be 30 years of pain … and then you own it! But, at least you have borrowed money for a “hopefully” appreciating asset. Make sure that any property you buy makes good sense – Schools, Transport, Parks, Shops, etc.

Another way to do this is “rentvesting”. This an option where you rent your place to live near your work while your are buying a place that you might want to retire to one day. Rentvesting makes sense when the costs to rent a place is cheaper than the buying costs (Loan Interest/Rates/Stamp Duty, etc). While you are renting in a share house or apartment the extra rental income from the property you own, and tax incentives, will allow you to use any surplus funds to invest in a share portfolio. Rentvesting can also increase your borrowing power and hopefully get a better property – Just don’t over extend yourself.

Get some Super

According to Investblue, in 2018, as boomers are retiring, the average retirement super balance in Australia for men is $270,710, and for women $157,049. This is not really enough, but an “average couple” would have over $400000. Things should get better as compulsory super has only been with us since 1991 . Boomers have had many advantages during a period of rapidly increasing asset prices – but compulsory superannuation over their whole working life was not one of them.

If you are relatively healthy and own your home outright, the Association of Superannuation Funds of Australia (ASFA) have estimated the annual retirement income required for a modest and comfortable lifestyle.

The Association of Superannuation Funds of Australia (ASFA) retirement standards for 2018

Using the average figures, there is a big gap between existing super saved and a comfortable lifestyle

80% of retirees fund their retirement years with a combination of superannuation and the age pension
Money Magazine June 2018

It is worth some study into how the pension and superannuation systems interact. The bare minimum to aim for is the “sweet spot” where under current rules, home owning couples can have $400000 in superannuation (singles $300000) and still qualify for the full government pension. Using this mix of super and the pension, when reaching the pension qualifying age of 67, a modest to comfortable retirement is possible under current rules.

Situation	Superannuation	Drawdown from Super @ 5%	Age Pension	Total Income
Single Home-owner	$300,000	$15,000	$19,210	$34,212
Couple Home-owner	$400,000	$20,000	$33,272	$53,272

Table from Realize Your Dream and based upon 2018 values

This “sweet spot” is our first “port of call” in super terms, and meant to demonstrate that if you own your own home and have a good chunk of super … then you are going to be OK in retirement.

Slack Investor hopes that you have got onto the idea of financial independence a bit earlier than aged 40. By starting to plan in your twenties or early thirties, you can aim to fund your own retirement … and, perhaps not wait until you are 67.

The Real October 2019 – End of Month Update … and Australia’s debt binge

Apologies to my faithful email subscribers, two days ago an unfinished version of this post was released into the ether. Slack Investor has rudimentary skills in the blogging arts and didn’t know how to recall the post. Anyway … this is what it was supposed to look like – with all information updated!

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. The Slack Investor followed overseas markets are a mixed bag with a flat ASX200 (-0.4%), and a dropping Brexit plagued FTSE100 (-2.2%). The good old US has shrugged off chants of “Lock him up” for their president and the S&P500 has had a monthly increase of 2.4%.

The Federal Reserve bank of Cleveland have the probability of a US recession within the next year at 31.0%, this has been gradually dropping since a peak at 41% two months ago. However, the current value exceeds the Slack Investor threshold of 20% and my monthly stop losses for Index funds are definitely “switched ON”

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Household debt – the couch is getting a little uncomfortable

According to 55,000 respondents to the ABC’s Australia Talks National Survey, debt is a major problem for the nation.

On an individual level, 37 per cent are struggling to pay off their own debts, with almost half of millennials reporting that debt is a problem for them personally …
Australia Talks National Survey

Australia may not be in the top four countries for Rugby these days but we are one of the world leaders in terms of household debt. In fact, we are second only to Switzerland. I am ashamed to say Australia’s Household Debt is world class and edging towards 200% of income. With such a big chunk of our disposable income leaking to debt, it is no wonder that recent interest rate cuts are not having much effect on the economy as Australian consumers try to tighten the belts. According to the Reserve Bank, it seems that, with stagnant wages growth, most are coping with their debt by reducing their consumption.

Basically, the Australian economy is facing a long period of sluggish demand growth as our record high household debt becomes a giant millstone around the economy’s neck.
From macrobusiness.com.au

Debt can be multi-headed with mortgage, credit card, personal loans and education components. The ME Bank survey has found that there is stress in some parts of the community. If your employment income is steady, in these reducing interest rate times, the fortunate have been able to keep up existing monthly payments to reduce overall debt. This is a good strategy. Most Australian homeowners are ahead of their payments – so there is a bit of a buffer. RBA statistics show that the average borrower is almost 36 months ahead of their required payments. Though, there are worrying signs in some households.

Of households with debt, there was an increase in the
number expecting they ‘will not be able to meet their
required minimum payments on their debt’ and ‘can just
manage to make minimum payments on their debt’ in
the next 6–12 months – 43% combined compared to
38% in December 2017.
ME Bank survey

With the number of mature-age Australians carrying mortgage debt into retirement increasing rapidly, many are intending to use a portion of their super (which was supposed to fund retirement!) to try to extinguish their debts when they retire. The ME Bank Survey found that even with compulsory superannuation, only around 18% of households expect to ‘fund retirement with their own super’ (down four points in the past six months). The proportion of households expecting to ‘use both private savings and the government pension’ increased two points to 42%.

I hope that our politicians have a plan for all of this – although, as this involves a bit of thinking beyond the next election, I doubt it!

September 2019 – End of Month Update … and Portfolio Trim

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. The Slack Investor followed overseas markets have had a bit of a recovery this month ( ASX 200 +1.3%; FTSE100 +2.8%; S&P500 +1.7%).

The Federal Reserve bank of Cleveland have the probability of recession within the next year at 37.9%. This exceeds the Slack Investor threshold of 20% and my monthly stop losses for Index funds are definitely “switched ON”

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). As it is the end of the quarter, the Slack Portfolio has been updated with some readjustment of the portfolio and a solid whack of cash (5.1%).

Trim the Sails … things might get rough

Trimming the Sails by Anton Otto Fischer – from Artnet

The economists at the Cleveland Fed are rating the chances of recession as significant. This is enough for Slack Investor to do a little portfolio trimming and try to dampen the effect on my capital if a recession does happen. I am a long way from going “all the way” and converting my entire share portfolio to cash-like products – though some pundits already have. There are a few reasons for this Slack approach

I am not a very good predictor of exactly when things might go bad
The returns for the safety of cash are not good at the moment, under 2%
I have a buffer of cash income that will help me weather through any economic downturn without having to sell any stocks at downtrodden prices – Those without a cash buffer or subject to sequencing risk should take a more prudent approach than Slack Investor.
Most of my stocks are producing reasonable dividends

Sequencing risk peaks in the seven or so years before and after retirement. Investors at this stage have a higher retirement balance and typically more of it invested in shares, meaning they have more to lose if sharemarkets tumble …
From an AFR article by Tony Featherstone

Sequencing risk refers to the possibility that a retiree that depends on his savings for income may have his capital (and future income) greatly reduced by a sequence of poor returning years (such as a recession!). The retiree would be in danger of having to draw down on capital at depressed prices.

A solution for retirees to the problem of sequencing risk is to set aside 2-3 years of income in cash assets that can be used for income while the underlying assets are waiting to recover. This strategy avoids a “fire sale of assets” during a recession.

Those younger folk still in the accumulation stage can hope that any future economic downturn does not affect the employment market too much – Jobs and income are a key to survival in tough times. As far as investments are concerned, the effects of a recession are only temporary and things will recover (see chart below). Downturns are a good time to start buying if you have any spare funds.

I am happy with my minimal trim approach as I generally invest in solid money earning companies that may suffer in earnings during a recession … but wont go broke and disappear.

For stock owners, recessions and economic downturns are only bad if you have to sell your stock before the inevitable recovery. In these trying times I am often comforted by long term share charts. Please note that any downturn is always followed by a recovery- though in some cases, it may take a few years.

This Long-term S&P chart for US stocks over 120 years (On a log scale). Periodic recessions are shown as grey columns – and the ability of stock prices to recover after any major world crisis is illustrated by the general increase in stock prices as you go forward in time. -From Business Insider Australia

My Slack trimming strategy has several components

Sell some of my stocks that have increased in price and now have extremely high PE Ratios – Although some, like Altium, are hard to let go. They are “old friends” and I am very sentimental to consistent company performance over many years.
Increase the weighting of my portfolio towards cash or bonds or fixed interest.
Try to be invested in companies may not suffer too much during an economic downturn i.e. Healthcare, Essential products.
Re-focus on dividends – the dividends might reduce a little in a downturn but the income is important. Dividends have in the past been much less volatile than share prices.

I have not changed the core of my portfolio, just fiddled around with 20% of it. Some more detail on the portfolio trimming in the next post.

Financial Advice – If you Must

Cartoon from the most witty and prolific Mark Lynch from toonpool

Slack Investor has long been in the school of “Educate Yourself” in financial matters and maintains this is the best way to do it – But a lot of people (Obviously not Slack Investor readers!) find financial organization very difficult. It is complicated to be across all the intricacies of saving, mortgages, superannuation, taxation, and investment. However, you can draw upon the wisdom of some smart financial bloggers here – Check out the Slack Blogroll – the internet is your friend.

If you must see a financial advisor, after the initial consultation, they will prepare a Statement of Advice – which should be the guiding document for your circumstances and contain a full disclosure of their fees.

According to the Productivity Commission, almost half of Australian adults need financial advice. With the industry coming under criticism for greed and conflicts of interest, it is difficult for consumers to be confident that they are receiving good advice.
from ABC News

Prepare for Layers of Fees

Let’s start with an example provided by ASIC – which I assume reflects typical financial advisor costs. Edward engages a financial planner to get a statement of advice together for his $400000 (including super). The adviser offers to put together a financial plan for $3,500 with a further implementation fee of $1,500. This almost doesn’t sound too bad so far – But, it is instructive to look at the full breakdown of costs below. Platform fees, ongoing advice fees, management fees and insurance premiums will result in poor Edward getting slugged $14000 in the first year and $9000 ongoing per annum. If these costs are typical, this is outrageous – He is paying 3.5% of his wealth initially, and then 2.3% ongoing. The fees can usually be paid separately or deducted from your investment income as part of your annual statement.

Example given by ASIC showing a financial advisor fee structure for the investing of Edwards assets of $400K From ASIC – Financial Advice Costs

The Hayne Royal commission exposed many cases where advisors were conflicted by personal gains (commissions, etc) when giving financial guidance. A lot of the commissions have been banned now, but there are sometimes internal incentives to recommend certain products. I don’t want to besmirch all advisors here, but it makes sense that you would have the best chance of getting good advice if your advisor was truly independent – There aren’t many of these according to ABC news, only about 60 in Australia – All are registered with the Independent Financial Advisers Association of Australia (IFAAA). But even with the independents, be wary of costs.

*Cartoon from the equally witty and prolific* Randy Glasbergen from source

If you don’t want to take the full responsibility for the nuts and bolts of financial independence onto yourself, I can see real benefits in seeing a knowledgeable fee-for-service financial advisor to set up a one-off tax effective savings structure that will guide you through the mid-thirties through till retirement. Or, it may be wise to get help for specific situations e.g., Self Managed Superannuation strategies.

Where I don’t see value is the too common situation where people front up to the financial planners on the doorstep of retirement with their life savings. There is the potential for an avalanche of fees – as well as the up front costs, each recommended product will have its own management fees.

Alternatives

Naturally, Slack Investor looks to reduce fees where possible. If you don’t want to go it alone along the “full monty” self-education route, there are some cheaper alternatives to the traditional financial advice model emerging. These Robo-Advice structures show promise for some aspects of the financial advisor’s job – How to steadily accumulate wealth and then, how to turn this wealth into an income to support your retirement. It’s new, it’s exciting it’s … Robo, it’s coming next month.

APRA … its even better than OPRAH

Hang on Slack Investor … What are you saying? Oprah, the font of lifestyle guidance … has a rival! How can the Australian regulatory authority APRA match Oprah wisdom that spouts such useful advice as this …

You can either see yourself as a wave in the ocean – or you can see yourself as the ocean – Oprah Winfrey – Source

Wheras Oprah has been an inspiration to millions, Slack Investor has a different, more researched, inspiration … he has fallen in love with an Australian statutory body – APRA is the Australian Prudential Regulation Authority.

Australia’s total superannuation assets rate of return – From APRA report

Oh APRA …. I do love you … You are the Ocean … it’s the indifference that you show me … the complete lack of spin … just information …. Oooohhh! you may have let us down in the distant past (HIH collapse, 2001), but your new muscular stance on differentiating between superannuation products is appealing … it gives me hope for all statutory bodies. One of APRA’s duties is to collect information on the superannuation sector and report. They report the total superannuation assets in Australia grew to $2.7 trillion in the year to June 2018. The Self Managed Super sector has a staggering 27.7% of these funds. Slack Investor is gladly part of this self managed sector and enjoys the flexibility of an SMSF. Last years average rate of return for all super funds was almost 8%.

The chart shows some great annualized Australian super returns for the past 5 -years of 7.9%

The Productivity Commissioner and Slack Investor hero Karen Chester argues that there is a need for the Super system to look after the default member who is likely to remain disengaged.

“what workers need is not “bells and whistles” – which bring with them higher fees – but “low-cost, top performers” with a “balanced investment strategy” Karen Chester From The Guardian

APRA continues to monitor performance of Industry vs Retail Funds and the yearly percentage advantage of having Industry funds(rather than Retail) is shown above.

While we wait for the politicians to act on these matters, get engaged and consolidate your super into one fund – and it should probably be an Industry fund. If Slack Investor can’t motivate you – then perhaps Oprah can … Right On Oprah!

“If you’re sitting around waiting on somebody to save you, to fix you, to even help you, you are wasting your time because only you have the power to take responsibility to move your life forward.” Oprah Winfrey – Source

May 2018 – End of Month Update … and the Productivity Commission creates new Hero

Slack Investor remains IN for US, UK and Australian index shares.

The Australian Index (+0.5%) has been a bit of a laggard with the banks still generating bad news and signs of the Australian property market starting to slow. The UK Index (+2.3%) and the US index (+2.2%) have continued to have solid growth.

The good news on the Australian Index (ASX 200) is the opportunity for Slack Investor to crinch up his stop loss from 5629 to 5724. A small movement upwards, but I always like doing this as it means that the Index has now set a new “higher low” The explanation for this technical stuff can be found here. A new “low” (or minimum) has been established at 5724 and this is my new stop loss on the monthly chart

Monthly chart for the ASX 200 – From Incredible Charts

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Productivity Commission gives the Super Industry a bit of a “Ginger Up”

I have been a fan of Australia’s Productivity Commission (PC) ever since I read their 2010 report into the sorry state of Gambling in Australia. The report is full of thought provoking and shameful material like- Australia is the world leader in number of poker (slot) machines per capita and Australia leads the world in gambling losses per person – but I digress…

The “Ginger Up” refers to an ancient horse racing practice that I wont elaborate on here – but it does make me squirm! The PC have just delivered their draft report on the state of Superannuation in Australia. God bless them .. they have put in “black and white” the rorts that exist in Australia’s good but not great superannuation system – and they have created a new Slack Investor hero.

The lead author in the report is the Productivity Commission deputy chair Karen Chester who has delighted Slack Investor with the following refreshing quote. Ms Chester’s attitude was like a snowball in the face after the my last depressing post on the mostly self interested world of banks and financial advisers.

Karen Chester – Photo from Quentin Jones

“the only thing I care about is member outcomes” from source

The Productivity Commission identifies two structural problems with Australia’s super model. The unintended creation of multiple accounts and the entrenched underperformance of some of the super funds that are allocated to the employee.

From Productivity Commission Superannuation report.

“Members are really lost in the weeds of product proliferation with 40,000 products. They’re bamboozled by poor disclosure and … poor advice.” Karen Chester from source

I am hoping that Ms Chester will get the final report out with haste. Slack Investor loves the smell of the draft report. The Federal Government would do well to take up her recommendations. The info graphic above puts some real world figures on what might happen if the PC recommended changes to Australia’s superannuation model are adopted.

It is a promising sign that the current Finance minister seems to recognize the problem.

“Super has become worse than a honey pot; it’s a trough.” – Financial Services Minister Kelly O’Dwyer source

Slack investor will look at the “trough” and PC draft recommendations in the next post. There are things you can do right now to protect your super.

The Royal Commission into Finance … Yes Please!

David Rowe cartoon From the Australian Financial Review – May be subject to Copyright

The incomparable David Rowe has a daily habit of drawing great cartoons. This image describes the current situation with the excrement covered big 4 Australian bank pigs dragging the Australian Treasurer and the Minister for Revenue and Financial Services along for the ride in front of the Royal Commission.

Lets start again with the astounding ASIC revelation

ASIC found that in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients. Further, 10% of the advice reviewed was likely to leave the customer in a significantly worse financial position.

Lets get this straight … I rock up to to a financial planner and I only have a 1 in 4 chance to get some advice in my best interests …. and, I have a one in ten chance of ending up in a significantly worse situation … What is going on !!!! – these are the people who many depend upon for sound financial advice.

The sad case of Sam Henderson

Sam Henderson outside the Royal Commission from news.com.au

Slack Investor writes about Sam only because he is still gobsmacked with the evidence presented to the Royal Commission on 24/04/18.

A bit of background … Sam Henderson is the very public and enthusiastic face of Henderson Maxwell, a financial advice and accounting firm. Sam has been everywhere in the Australian financial media for the past few years with his own weekly TV show and newspaper columns. Slack Investor admits to being a great fan of Sam’s podcasts Sky News “Your Money Your Call” presented weekly on Thursdays. In these podcasts Sam, and others, dispense generally good advice about retirement issues and superannuation.

I have found their program to be extremely informative. They have talked a lot about Self Managed Super Funds (SMSF’s), retirement strategies and taxation – Advice that Slack Investor has found very helpful.

However, Sam has fallen foul of the Royal Commission. Henderson Maxwell charged $4950 up front to give advice to a client that would have been to her detriment – to the value of at least $500 000. It appears that Sam’s firm has acted in their own self interest rather than the clients. Specifically, Mr Henderson urged his client to establish a SMSF and remove her super investments from a generous public sector deferred benefit fund to invest in Henderson Maxwell products, which would have earned him ongoing fees.

The fees proposed by Sam Henderson’s advice would have annually amounted to $19,000 while the client’s existing strategy was costing her $2768.

Although, through this public shaming, Sam has carried a lot of the heat for the widespread malpractice by the banks and financial planners. This case represents the huge problem with the financial industry in Australia and the reason why Slack Investor has educated himself in the dark art of finance rather than rely on a financial advisor to dictate strategy for him.

One of the most galling things about this case is that Henderson Maxwell is considered to be one of the leading firms for giving financial advice. They are the winner of the 2016 Australian Association of Financial Advisers (AFA) award for practice of the year. The AFA advertise their advisers as “Trusted, Knowledgeable, Reputable, Respected”

Slack Investor admits to being a flawed human – but he would hope that he would act ethically even as the financial system drapes its lucrative reward tentacles tantalizingly in front of him. In the case before the Commission, Sam Henderson responded to financial incentive.

What is wrong with the Financial Advice Industry?

Charlie Munger -Source

“Show me the incentives and I will show you the outcome” –

Charlie is vice- Chairman of Berkshire Hathaway and dispenser of financial common sense – another Slack Investor Official Hero

This sums things up. At the moment most financial advisors are given incentives to sell their own products – there is no incentive to represent the best interests of their clients. The regulator ASIC has done a review of the quality of financial advice that had been provided to SMSF’s, and found that

90% of cases had failed to be in clients’ best interests.

It is hoped that the Royal Commission will accelerate change. The Financial Review reported that four years ago the head of the Financial Planning Association (FPA) called on financial planners to unite and push for the separation of product from advice. In the meantime, the vertically integrated financial planning money machine with its fees and trailing commissions has kept on rolling on …

The Hayne Train should address these issues before finally pulling up to the station – While we are waiting, if you really need a financial planner, only use a truly independent advisor registered with IFAAA – No affiliations with product, no commissions and no asset fees . There will be an upfront fee for the advisor’s service – but this fee should be small in comparison to the ongoing costs associated with the lifetime tenure of an affiliated advisor.

Fat Pigs and Fat Cats

From fithfath.com – The image is from the action rhyme “… this little piggy had roast beef” – but its such a great picture .. it’s in!

“… the farm had grown richer without making the animals themselves any richer — except, of course, for the pigs and the dogs.”

George Orwell – Animal farm (1945)

There is a bit of an animal theme in this post as Slack Investor pays tribute to George Orwell and his book Animal Farm. The “pigs and the dogs” have all the power in Orwell’s allegorical tale – and, with Australian’s paying $31 billion annually in super fees, there are plenty in the superannuation fund industry that are getting richer like the “pigs and the dogs”.

In common with most of the school essays that I wrote … after an interesting start, things start to fall apart … and I can’t stretch this narrative too much further. In Animal Farm, two of the leading pigs inspired the other animals to revolt against the humans … and, I cant see any of the retail super fund executives (who are benefiting from the status quo) getting us to demand lower fees – So it is up to us … Come on other animals … Let’s break out of our “profound disengagement” with our retirement savings and … Let’s revolt against these fees!

A good start would be to avoid most of the large institution owned retail funds (big banks, Macquarie, AMP) which creamed $12 Billion in super fund fees during 2016. While they were doing this, they delivered returns of 2 per cent less (pa) when compared to Industry super funds over 10 years. This under-performance, if continued, could cost $200,000 in retirement savings over a working lifetime.

So stand tall on your hindquarters all you downtrodden animals and firstly check where your current employer-paid super payments are going.

With few exceptions, you have a legal right to choose where your employer pays your superannuation contributions. If you formally notify your employer of your preferred fund, they must direct their employer contributions into the superannuation account of your choosing.

From Goodsuper.com.au

A recent survey by Stockspot “Fat Cats Fund Report 2017” looked at 4,102 Australian funds, sorted them into categories from Conservative to Aggressive then filtered them for relatively poor performance after fees over 1, 3 and 5-years. Stockspot calls these poor performers “Fat Cat” Funds.

At the other end of the scale, there are the “Fit Cats” with relative outperformance – these are the ones that you want! Stockspot found that fees were really important when measuring performance – if you are in a fund charging more than 1.5% per year, it is at high risk of becoming a Fat Cat Fund – to check how your fund rates according to Stockspot, go to this link.

A comparison of Retail Super funds and Industry Super funds – and how they fit into the Stockspot FatCats and Fair Cats rating system – From Stockspot.

So, as banged on about in a previous post, Industry funds generally have lower fees but Stockspot recommends looking further into the relative performance of each industry fund (after fees) over a period of at least 5 years as there is considerable variation in performance.

To flog a dead horse ( You will have to read Animal Farm to really get this pun … Sorry Boxer, Vale!) … and with apologies to George Orwell again …

Not all industry super funds are equal … some are more equal than others

Spaceship … Let Me Out Here!

Hey you Millennial dudes and hipsters… Suh!

Space … sounds good … its so snatched! … Spaceship … even better. Come on … lets get on board. Superannuation is so boring … but Spaceship .. Its so now – isn’t Elon Musk working on one?

What Slack Investor is referring to is the reach out to the younger crowd of cool new investor products that will look after your superannuation in a really cool way. Spaceship, is just one of the new breed of disruptors (e.g, Zuper, MobiSuper, Grow Super) that is encouraging you to put your super investments into a high tech sounding enterprise that focuses on new technology companies. It seems that their marketing push has been successful with at least $100 million in funds under management for Spaceship.

Now, Slack Investor has a soft spot for disruptors that make use of new technology to help the investor work more efficiently through lower costs and new platforms. However, Spaceship and their ilk are not, so far, disruptors. They are just a repackaging of the same old greedy financial industry that are trying to separate the investor from their hard earned loot.

We had a look at the critical importance of fees in investment in an earlier articles here and here. Despite the marketing fluff, Slack Investor is getting off the couch and drilling down. A highly recommended process before you part with your money to anyone. Spaceship fees are 1.6% plus administration, MobiSuper fees 1.5% plus admin fees, Grow Super fees are 1.85%! Fees are critical to investment returns.

The same drilling down process can be done in the USA with Individual Retirement Accounts (IRA) or employer sponsored 401(k) plans. Google is your friend – Long term performance and Fees Fees Fees is what you are looking for. A good articles for the USA on fee impact can be found here, And for the UK here.

The Australian Securities and investment commission (ASIC) says

A 1 % difference in fees can lead to a 20 per cent difference in the value of a superannuation benefit over 30 years.

From Hostplus – Money Magazine Best of Best 2017

The above table shows some existing funds that have established long-term returns and with a fee structure less than 0.5% for $50000 invested.

So get out of the spaceship … and relish life on planet Earth with some low cost super funds … they are so “On Fleek” as far as your money is concerned.

Superannuation … Engage! – Part 2

You have been busy (and definitely not Slack) and gone through the paperwork that combines your super funds into one fund that you will keep for your working life. You have probably found an Industry Super Fund provider with established performance and low fees … Sorted!

Slack Investor is proud of you!

However, a little more work is required. The default investment option for most funds is called “balanced” – that sounds pretty cool – who wouldn’t want to be balanced! Generally Balanced options comprise 60-70% in growth assets and 40-30% in income assets.

The options that your fund may offer you are … in terms of increasing risk are

Cash – Invests 100% in bank deposits or other ‘capital guaranteed’ products.
Conservative – Around 30% in shares and property with the majority in fixed interest and cash.
Balanced – About 70% in shares or property, and the rest in fixed interest and cash.
Growth – At least 85% in shares or property.

If you are young … go for Growth, or High Growth … every time! Your super will be invested for 40-50 years and this is plenty of time to ride a few bumps that Growth assets such as shares and property can sometimes throw … Embrace risk and ride these bumps …. It is a good lesson to realise that the beautiful dance between risk and growth must be part of your investing life – Without risk, it is impossible for your investments to grow substantially.

Depending on your time frame, your tolerance to risk will vary. There are good reasons for someone approaching retirement to step back from a growth at all costs investment strategy. But, if you are just starting your working life, and want to grow your superannuation in a meaningful way … time is on your side … and risk is part of this process …

Australian Super have crunched the numbers and found that

YOUNG workers choosing “low risk” investments for their superannuation may be up to $170,000 worse off

The appealing sounding “low risk” options mostly deliver returns not much higher than inflation … And, we are not interested in just tracking inflation … we want growth!

If your superannuation amount is low and you want to give it a bit of a boost, and you earn less than $51,021 (2016/2017 year), the Australian government runs a co-contribution scheme that will reward you on a sliding scale – If you earn less than $36,021, the tax office will automatically kick in a maximum $500 for a $1000 after tax contribution to your super fund – This reward gradually tapers to zero as your income approaches $51,021. This is a pretty good return for your investment!

Grandparents and parents please note – if your wonderful offspring have a part-time job and a compulsory super fund – and you have a windfall that you would like to pass onto the next generations that cannot be frittered away on teenage pleasures – I am reminded of the fantastic George Best quote here.

I spent a lot of money on booze, birds and fast cars. The rest I just squandered.

Despite the wisdom of George Best, a gift of $1000 that would go directly to your loved one’s super fund would attract this govt co-contribution and be a great lesson in the benefits of compounding interest.