Here’s a scary stat: making the wrong choice with your superannuation could cost you more than $100,000 in retirement savings.
That’s the finding from new RateCity research into superannuation, which compares 40-year performance scenarios based on different fees and investment options.
We know super is hard. There are so many variables to get your head around. So how do you know which is the best fund and the best investment option for you?
To help you out, we’ve used the ASIC superannuation calculator to research different scenarios.
Industry funds v retail funds
Industry super funds are not-for-profit funds, while retail funds are for-profit funds. Industry funds have a higher customer satisfaction rating (62.1% v 55.7%), according to a new report from Roy Morgan Research.
Those small fees can make a big difference
First, we’re going to compare the impact of fees, ranging from low through to high.
We’re going to make a few assumptions about you:
- You’re 27 years old
- You’re earning $75,000 per year (and will for the rest of your career)
- You’re planning to work until you’re 67 (which will become the official pension qualifying age in 2023)
We’re also going to make a few assumptions about your super:
- You’re in a ‘balanced’ fund
- It has an investment return of 4.8% p.a. (before taxes and fees)
- It has tax on earning of 6.5% p.a.
- It has investment fees of 0.5% p.a.
Based on those assumptions, you’ll make $239,161 in superannuation between ages 27 and 67 if you choose the high-fee fund and $347,430 if you choose the low-fee fund.
That’s a difference of $108,269.
|Fee level||Contribution fee||Admin fees (p.a.)||Indirect cost ratio (p.a.)||Final total|
How much do I need to retire?
To live a modest lifestyle, singles need $27,648 per year and couples need $39,775. To live a comfortable lifestyle, singles need $43,317 and couples need $60,977.
These numbers come from the ‘ASFA Retirement Standard’ for Australians aged about 65. Slightly lower numbers apply for those aged about 85.
Different investment options can also make a big difference
Now, we’re going to have a look at how different investment options can affect your nest egg.
Again, we’re going to assume you’re 27, you’re going to work until 67 and your salary is $75,000.
We’re also going to make these assumptions about your super:
- You’re paying ‘medium’ fees
- Your contribution fee is 0%
- Your admin fees are $50 p.a.
- Your indirect cost ratio is 0.6% p.a.
Based on those assumptions, you’ll make $225,132 if you choose the cash investment option and $339,074 if you choose the high-growth option – a difference of $113,942.
|Investment option||Investment return (p.a.)||Tax on earning (p.a.)||Investment fees (p.a.)||Final total|
Why wouldn’t everyone choose high-growth?
Historical averages show that high-growth investment options tend to produce better long-term returns than conservative options.
However, they also experience more volatility: they might post big gains one year and big losses the next.
Conservative options, by contrast, are less volatile, and experience both smaller gains and smaller losses.
Some people might choose conservative options because they want to reduce their risk. Others might start with growth options but then go conservative as they near retirement, to avoid losing a big chunk of super just before leaving the workforce.
How to change your super
Now that you’ve seen all those numbers, do you feel like changing your super?
If so, we’ve got you covered.
Changing your superannuation fund is simple. You can do it online through your MyGov account. Or you can fill in a rollover form and send it either to the fund you’re about to leave or the fund you’re about to join.
Whether you choose the MyGov option or the rollover form option, you’ll also have to notify your employer and complete a standard choice form.
Of course, you might want to stay with your current super fund and simply change your investment option.
Again, that is a simple process. Many funds will allow you to change options over the internet. If yours doesn’t, contact your fund and ask how to proceed.