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A quick guide to super for the smashed avo generation

super superannuation gen y millennial salary sacrifice fund contribution invesmtent fees consolidate

We all want to have plenty of money to do the things we like and not have to worry, but sadly more than 50% of Australians spend what they earn or more than what they earn.

What is even more alarming is that means the majority are essentially broke, as they can’t survive for more than three months without an income source. Even more alarming is that one in four has $1000 or less in the bank.

Millennials are not immune to this behaviour, and many have the same goals as their parents in that they want to own their own home and live comfortably in retirement.

Sadly, however, while most parents have their own home, some continue to struggle to live a comfortable retirement.

Let’s face it, as a millennial if you want to retire comfortably then you need to do something your parents didn’t have to do well.

Unless you have had your head in the sand you will know that your employer super contributions will not be enough to build your nest egg.

Therefore, you need to make some choices about your superannuation, which can be broken down into two areas:

1. The superannuation fund that you will use

2. Whether you will make extra contributions over and above your employers so you can boost the amount of super you have to allow it to compound. That way when you stop working you will have a comfortable retirement

 Why grow your super?

There are many good reasons why you need to grow your super:

– We are now living longer and millennials will live longer than their parents, so you might just live to be 100 and you need to ensure your money lasts as long as you do.

– The cost of living increases all the time and you need to not only keep pace with that but do better so your wealth grows.

– The age pension alone is not enough to retire on now and this will only get worse over time.

– There are good tax benefits that encourage you to grow your superannuation.

What should you look for when choosing your superannuation fund?

There are two areas you need to consider:

Your investment choices

 These are broadly broken up into cash, shares and property with each superannuation fund applying different ratios to these investments based on the goal of the fund, whether that be aggressive, growth, balanced or income driven.

Given that millennials won’t be retiring for quite some time, generally they would lean towards more aggressive or growth type funds to gain as much growth and compounding as possible.

This also means there will be more volatility in the returns of the funds, which is why you need to be patient.

Fees

It is important to ensure that you consider the fees you are paying to have someone else manage your superannuation as less fees can mean you have more in your super, which is critical to your retirement.

Would it surprise you to know that by generating just 3% better returns each year over 40 years your superannuation will more than double. That is why understanding the impact fees can have on your superannuation is so important.

All superannuation funds have fees and other costs although some charge less than others.

Generally, the more passive the goal of the fund the lower the fees are, which means your returns may be lower, which is why you need to consider both the returns you are seeking to achieve as well as the fees you will pay.

The main types of fees you will pay include:

– Administration fees: These are fees to cover the cost of operating the fund and maintaining your superannuation account.

– Investment fees: These are paid to the investment manager of the fund and as previously indicated will vary depending on the investment style chosen.

– Indirect costs: These costs are paid by the fund to external service providers that are passed onto account holders.

– Advice fees: If you use a financial adviser, you will generally pay for this advice from your super fund.

– Switching fees: There may be fees for changing your investment option within the fund.

– Buy/sell spread: This is a fee you may pay every time you make a transaction and is based on the unit price of the fund. The transactions can include making a contribution, switches and -withdrawals.

– Insurance premiums: Many super funds have a set default insurance option. You can usually choose to lower or increase your level of cover based on your needs.

– Exit fees: A fee for leaving the fund.

– Activity-based fees: These fees are charged if your super fund provides you with a particular service, for example, a family law split fee, where you are charged to split your super following a separation and family law court order.

It is important that you check your annual statement every year to see what fees you are paying and if they have increased. In short, make sure you are happy with what you are paying and the return you are getting as 3% can really make a difference.

Be proactive

– Before setting up your superannuation make sure you read the product disclosure statement and understand what you are getting.

– If you are not happy or unsure about any fee you are paying, contact your super fund and consider asking how you can stop these fees being deducted, or consider changing funds.

For millennials, it is even more important to effectively manage your superannuation from a young age rather than take a passive approach as the rewards will be there in retirement because you will have more money, which means you have more choice and more flexibility.

You will also gain freedom and peace of mind along the way as you know you are creating a comfortable retirement.

Written by Dale Gilham

Dale Gilham

Dale Gillham is chief analyst for Wealth Within.

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