Don't Let Super Leave You Out Of Pocket

Sun Herald

Sunday May 8, 2005

Debra Cleveland

A tiny difference in charges or performance can have a giant impact at retirement, Debra Cleveland writes.

SUPERANNUATION choice is almost here from July 1 you will be able to choose your own fund, whether you're just starting in the workforce or wanting to transfer from your existing fund.

"So what?" many of you may be saying. "It's just another boring super change that will have little impact."

Wrong! It could mean hundreds of thousands of dollars to you the difference between a comfortable retirement or years of scrimping if you're prepared to follow more closely what your fund is doing.

Take your fund's investment performance, for example. Did you know that if it lags behind other funds by just one percentage point for 20 years, it'll reduce your end benefit by as much as a quarter?

So if you'd been banking on $400,000 on retirement, says SuperRatings managing director Jeff Bresnahan, your fund's underperformance would cost you $100,000 and you'd get only $300,000 instead.

How much you pay in fees also has a key impact.

Bresnahan says fees range from 0.7 per cent to just over 4 per cent. If your fund charges 4 per cent, your payout will be 70 per cent less than a fund charging 1 per cent. Remember that $400,000 payout? How would you feel about receiving $120,000 instead?

The pick of the bunch

SuperRatings is one of a growing number of analysts that compare super funds. The accompanying table shows its top-ranking 14 public offer funds they're open to new members, although some of them are industry-specific funds such as REST (which only retail employees can join) and CARE (for clerical and retail employees).

They're rated the best funds not just because of good performance and competitive fees, but also because they measure up well across other areas such as member education, insurance and service.

"To look at performance in isolation is flawed," Bresnahan says, "because you may be paying high fees for that performance and you may be receiving poor service."

What these 15 funds represent is the best value for money good performance and extras in return for fees at the lower end. Those with platinum ratings are the best and are all industry or not-for-profit funds. The five gold-rated funds include commercial funds i.e. multi-employer master trusts.

There are no retail funds what Bresnahan calls personal super plans because he says they represent no value for investors, mostly because of higher fees.

The funds in the table are intended as a guide only, as an aid to comparing your own super fund. When you're looking at investment performance, Bresnahan says, compare longer-term performance of five years or more. The table also shows average returns across all super funds, a useful benchmark.

And if you're not happy with your own fund, ask questions.

"Half the trouble with super is people have been sucked in by the view that it's a long-term investment and that there may be bad years but it'll all be OK," says Alex Dunnin, head of research at Rainmaker Information. While that's "nice in theory", he says, investors can lose out by staying with a fund that underperforms over the long term.

"If your fund is doing badly now, don't panic," he says. "It's a good time to ask the fund what's going on."

It's not all about returns

Look at your fund's other features, too. Service is important, Bresnahan says. "During that lifetime experience [investing in super] do you really want to sit on the end of a phone for 14 minutes waiting for a response each time you phone?"

What about member education? For example, if you want to find out more about how the government co-contribution works, is that information accessible on your fund's website?

Think about the insurance deal as well. Before you seriously consider switching super funds, take a careful look at another potential fund's insurance arrangements can you get the same or more cover at the same price, and will you have to undertake a medical to get it?

Lastly, says Fiona Halsey of legal firm Halsey & Associates, before you switch, check whether the new fund offers what is called a binding death benefit nomination.

This means that if you die, your benefits are paid exactly according to your wishes.

Many large funds don't offer these and instead have a nomination, which the fund trustee could ignore.

"I have seen cases where the 'beneficiaries' were very distressed as they were under the impression they would receive all of the death benefit due to the nomination completed by the member," she says. "At a time when the potential beneficiaries are already distressed due to the death of the member, the fact that they won't automatically receive the money adds to this distress.

"If a fund doesn't offer binding death benefit nominations, the member has no control over where their death benefit will be paid."

Try the seven-step check list

WILL you be left short in retirement? Calculate whether you're putting enough away by working through our seven-step superannuation test.

To guide you through the process, follow our imaginary couple, Morris and Julie, and compare your own situation.

Morris, 35, earns $80,000 a year plus 9 per cent superannuation. His wife Julie, 32, is the principal carer of their two children.

Morris has $40,000 in super, while Julie's is negligible.

1 How long are you likely to live in retirement?

If you intend retiring at 65 you'll probably have to fund at least 20 years because we're all living longer, says Asteron technical services manager Angelica Ricci, who prepared the test.

2 What do you want to do in retirement?

If you dream of overseas holidays and expensive hobbies, you'll need more income. Morris and Julie want to enjoy travel and eating out when they retire.

3 What income will you require?

The Association of Superannuation Funds of Australia (ASFA) estimates the basic cost of a "comfortable" retirement is $33,000 for an individual and $44,000 for a couple. Ricci says this allows only occasional spending on comforts. If you want more, the rule of thumb is at least 65 per cent of your pre-retirement income, which is what Morris and Julie want.

Taking a conservative approach, factoring in no big pay rises, only inflation of 3 per cent, Morris's $80,000 salary will increase to $194,000 when he is 65. So the couple will need $126,000 a year in retirement ($194,00 x 0.65). To work out what your own salary will be just before you retire, the quickest way is by using an online compound interest calculator, such as www.moneychimp.com/calculator/compound-interest-calculator.htm, inserting your salary, the number of years until retirement and a forecast growth rate. (To do it on a standard calculator, multiply your current salary by 1.03, if you're also using 3 per cent a year inflation, then multiply the answer by 1.03 and so on; do it 30 times if you have 30 years until you retire, 10 times if you have 10.)

If that's all too hard, it can also be instructive to calculate the figure in today's dollars just take 65 per cent of your current salary. For Morris and Julie, this is $52,000 ($80,000 x 0.65).

4 What is the total amount you need to save?

The accompanying table shows the lump sum needed to generate different income levels over several retirement periods. It shows retirement income in today's dollars so to receive their $52,000 target income for 20 years Morris and Julie will need between $700,000 and $770,000. They'd need more if they wanted to retire earlier.

5 Evaluate your savings

Work out the value of assets such as super, managed funds, shares and investment property. Morris and Julie have only the $40,000 in super. With future 9 per cent employer contributions and an earnings rate of 6 per cent, Ricci says this will grow to about $386,000 over the next 30 years. You can work out what your super will be worth by using ASFA's Super Smart Planner calculator on www.asfa.asn.au/calculator.

6 Work out your "savings gap"

Subtract the estimated value of your retirement savings (step 5) from the nest egg required (step 4). The difference is the amount you'll need to save. Morris and Julie have a savings gap of about $384,000 ($770,000 minus $386,000). What they're putting into super at the moment will fund a retirement income of only between $25,000 and $30,000 a year, says Ricci.

7 How much should you save?

As a rough guide to how much extra you need to save from every pay cheque, says Ricci, divide your "savings gap" by the number of years to retirement, and then by the number of pay cheques you receive a year. This doesn't take into account future earnings or inflation.

Morris and Julie will need to save an extra $1100 a month 16.5 per cent of salary. That's going to be hard to achieve, even after reviewing their spending, so they're seeking the help of a financial adviser to discuss ways to get their money working more effectively for them. But they shouldn't leave it too long, says Ricci, because if they waited another 10 years they'd have to save at least $1600 a month, or 24 per cent of salary.

© 2005 Sun Herald

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