- 1. Adjust your income during your working life
- 2. Manage your tax bill
- 3. Review your level of super contributions — one-off or regular contributions.
- 4. Maximise years of contributions.
- 5. Decide on desired rate of investment return.
- 6. Decide on years that you hold investments or hold your super account.
- 7. Manage level of fees.
- 8. Review your proposed retirement age.
- 9. Working (and contributing to super) in retirement.
- 10. Receiving an inheritance or other lump sum payment.
Investment returns for most super accounts in Australia were abysmal for the 3 months to 30 September 2011, with the median growth super fund losing 5.1% for the quarter, although the sharemarkets did roar back to life in late-October 2011.
The more disturbing fact for Australian superannuation account holders is that long-term investment values have stalled at pre-October 2007 levels, while we all wait for the investment markets to fully recover. The median annual return for a growth super fund over the 5-year period to 30 September 2011, is a measly 0.8% per year, although over the 10-year period to 30 September the median annual return is 5.5% per year, according to Chant West. For the higher risk investment options, the median annual return over a 5-year period is in the negative, which means that for the past 5 years, on average, the higher risk options (with 80% or more of assets invested in growth assets such as shares and listed property trusts) have lost money every year!
According to rating company, Chant West, Australian super fund members will have to wait two more years to recoup the value of their super savings as at October 2007. Although this is rather depressing news, super fund returns had been in positive territory for the previous two financial years (2009/2010 and 2010/2011).
What has been your reaction to the GFC? Have you adopted a ‘wait and see’ strategy, or have you switched investment options, or even stopped making super contributions?
For many Australians, especially retirees, it is a frustrating time and for some retirees, a financially devastating time.
At some stage, most investors will accept that we can’t turn back time, and that much of the impact of the GFC is outside our control. It is possible however to soften the impact on our personal wealth from the long-term consequences of the GFC and the volatile post-GFC recovery phase. Even in these uncertain times, we can take some positive action to improve our financial circumstances, and rebuild our retirement savings. For a large number of Australians this positive action has taken the form of increased cash holdings or reducing debt.
How are you going to rebuild your savings in the post-GFC era?
I have compiled a list of 10 practical and common-sense (unless you have lost faith in super) strategies that individuals can consider as a means to take back control of their wealth accumulation plans.
Warning: Due to the recent volatility in super fund returns, some of the strategies outlined below may require you to ‘keep the faith’ that super fund account returns will continue to trend towards the 20-year long-term average of 7% a year (see article 20 years of SG delivers 7% a year).
1. Adjust your income during your working life
Harsh as it may sound, some Australians will have to work longer hours or even delay retirement. For many working baby boomers the GFC has meant making the decision to delay retirement, and for retirees, a return to the workforce (see Strategy 9). Your level of income can affect your wealth accumulation plans in at least four ways:
- Your employer contributes the equivalent of 9 per cent of your salary to your super fund under the superannuation guarantee rules, which means the higher your income, the larger your employer’s contribution will be, subject to an upper salary limit.
- If you’re self-employed, then you must take positive action to build your super benefit or private savings.
- If you enjoy an above-average income, you may have higher expectations for your lifestyle in retirement than an individual on a lower income, and you’re likely to have more disposable income to redirect to superannuation or other type of savings plan.
- Earning an income for longer means that you are not relying on your savings to live, preserving your capital for longer.
2. Manage your tax bill
The more tax you have to pay on your personal income, and other investments, the less money is available to invest for your financial future. Tax-friendly investments such as superannuation can help Australians reach their financial goals faster because, depending on your income, less money is snuffled up by the taxman. Super may be the last place you can imagine placing your hard-earned savings after the roller-coaster investment ride of the past 3 years, but if you’re accustomed to using tax-minimisation strategies to reduce tax and boost savings, then super, or other tax-effective strategies such as negatively gearing an investment property are likely to become popular again. In terms of super, the higher your income, the more likely that you will choose to make before-tax (concessional) super contributions, rather than after-tax (non-concessional) contributions, because you can save thousands of dollars in tax this way. Remember, most retirees can expect to pay no tax in retirement if their savings are in the super system.
3. Review your level of super contributions — one-off or regular contributions.
If you add more money to an existing pool of money, you will obviously have a bigger pool of money. Likewise, if you make additional super contributions, you can expect your superannuation balance to grow faster. You also have another element boosting your super savings — compound earnings (or losses in recent times, although long-term returns may trend back to 7% a year). Your superannuation account receives returns or earnings from your super fund’s investments, and then those earnings are re-invested with the balance of your super account, giving you even more returns (eventually!). Compound earnings, plus regular additional contributions, or even one-off contributions, can accelerate the growth of your super account over time.
4. Maximise years of contributions.
The longer the timeframe in which you make regular contributions, the more money is invested over time for your retirement. More contributions from you (and your employer) means a larger pool of savings, and your super account reaps the benefits of compound earnings (assuming super fund returns revert to long-term averages) for a longer period of time, creating a larger final super balance.
5. Decide on desired rate of investment return.
The return, or earnings, on your superannuation account or other non-super savings, is the key contributor to wealth accumulation. If you want higher returns, you generally have to take higher risks, which can mean investment losses in some years. For some individuals, losing money is too stressful and they would rather opt for an asset allocation that delivers a moderate long-term return, and invest for a longer period, or contribute more regularly, or even delay retirement to accumulate a larger super balance. (You may decide to review your super fund as well.) In case studies and examples published on this website, I use 7 per cent after fees and taxes as the assumed rate of return.
6. Decide on years that you hold investments or hold your super account.
Time is the key when accumulating wealth. You let compound earnings weave their magic and, if you choose, you can rev up your superannuation savings with additional super contributions. If you don’t have time on your side, however, then you may have no choice but to contribute more money, or take more risks when investing, or decide to accept a less costly lifestyle in retirement. Note that taking more risks also means that you have a higher chance of losing some of your savings.
7. Manage level of fees.
Fees, like taxes, are the hidden enemies of investors, although fees are necessary if you’re planning to rely on someone else to invest your super money. Even when you choose to run your own super fund (a self managed super fund) you will still encounter fees. The trick is to manage the amount of fees that you have to pay. The key to accumulating wealth, however, is the return on your investments — maximising the long-term return after fees and taxes.
8. Review your proposed retirement age.
If you retire too early, you can miss out on important extra years for accumulating wealth for your retirement. A further disadvantage when you retire too early, is that you need to save more for your retirement because you will need to finance more years in retirement. Generally speaking, the earlier you retire, the smaller your super payout is, and the longer it has to last. In comparison, the later you retire, the larger your super account balance and you then also have fewer years in retirement to finance with your lump sum.
9. Working (and contributing to super) in retirement.
If you’re willing to continue working when you retire, especially if you plan to retire before Age Pension age, the amount of money that you need on retirement is a lot less, because you’re providing a second income stream sourced from your work income. If this is an option you’re considering, then you need to be very particular about your plans, because most individuals choosing this option work only for the first few years of their retirement, and then rely solely on superannuation and non-super savings, and the Age Pension (if they are eligible). If you’re retired, then returning to return to full-time or part-time work can protect your capital and allow you to rebuild your savings.
10. Receiving an inheritance or other lump sum payment.
You may receive an inheritance later in life, or other lump sum (such as the proceeds from a divorce settlement or sale of a property) that you can put towards your wealth accumulation plans.