- 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, and insurance premiums
- 8. Review your proposed retirement age
- 9. Working (and contributing to super) in retirement
- 10. Receiving an inheritance or other lump sum payment
I am waiting for the final report of the Financial Services Royal Commission before I fully express what I think about the behaviour of the financial services industry as a whole, including the superannuation industry. Apart from the apparent incompetence and dishonesty of some players in the financial services sector, the overwhelming flavour I have picked up from the whole process is complacency by nearly every organisation that has appeared before the commission. In nearly all circumstances, financial organisations appearing before the commission have failed to act, failed to protect, failed to refund and damningly, failed to rectify glaring breaches and follow through with compensation.
The most disturbing aspect of the revelations is that the practices uncovered by the commission have been going on many, many years. And for those in the industry who may lament, ‘not all of us are like that’, then after 30 years of compulsory super and the oversight of the industry by two regulators, the Australian financial services industry needs a large broom to sweep away the historical cobwebs of complacency, and the current-day evidence of apparent incompetence and corruption that appears to exist in some of our major financial organisations (at least based on much of the evidence heard at the Financial Services Royal Commission).
In the meantime, I offer some practical strategies to help readers move beyond the findings of the Royal Commission, and even move beyond the actions of many financial advisers (noting that some advisers focus on the best interests of clients).
Not all strategies in the list below relate specifically to superannuation, but a few years ago, I offered a not dissimilar list to readers after the devastating effects of the Global Financial Crisis (for background on the GFC, see SuperGuide article Ten years on: Four lessons from the GFC (Grab-For-Cash)).
If you can’t control the environment you invest in, you can certainly control how you react to that environment.
I have compiled a list of 10 practical and common-sense strategies (unless you have lost faith in super) that individuals can consider as a means to take back control of their wealth accumulation plans.
1. Adjust your income during your working life
If you have left saving for retirement until later in life, or have suffered financial losses due to bad investments, or still suffering since the Global Financial Crisis, then harsh as it may sound, some Australians will have to work longer hours or even delay retirement. For example, for many working baby boomers, the GFC 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 9.5% 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 (see SuperGuide articles Superannuation and employees: 10 facts about your super entitlements and Maximum SG employer contributions for 2018/2019 year (and previous years)).
- If you’re self-employed, then you must take positive action to build your super benefit or private savings (see SuperGuide article Who can now make tax-deductible super contributions?).
- 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 (see SuperGuide article Salary sacrifice and super: How does it work?).
- 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. Although super’s reputation may be slightly tarnished due to the shenanigans of some of the service providers, super remains a concessionally taxed investment vehicle (see SuperGuide articles Income tax: Australian tax brackets and rates (2018/2019 and previous years) and Super for beginners, part 17: Four must-knows about super’s tax rules).
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 possible strategies. 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. Note that higher-income earners pay more tax on super contributions (see SuperGuide article How the Division 293 tax works: Super surcharge for high earners).
Remember, most retirees can expect to pay no tax in retirement if their savings are in the super system (see SuperGuide articles Tax-free super for over-60s, except for some and How does SAPTO work? (Senior Australians and Pensioners Tax Offset)).
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.
For information on super contributions, and on the benefits of compound returns, see the following SuperGuide articles:
- Super concessional (before-tax) contributions: 2018/2019 survival guide
- 2018/2019 guide to non-concessional contributions (after-tax super contributions)
- Doubling your wealth is a super compound: Rule of 72
- Investment returns after retirement: Understanding the 10/30/60 Rule
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.
See SuperGuide articles Doubling your wealth is a super compound: Rule of 72 and Investment returns after retirement: Understanding the 10/30/60 Rule.
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, we generally use 7 per cent after fees and taxes as the assumed rate of return.
For information on how super investing work, including expected long-term returns, see the following SuperGuide articles:
- Investment performance: 26 years of SG delivers 7.5% a year
- Top 10 performing super funds for 2017/2018 financial year (and previous years)
- Top 10 performing super funds over 10 years (to 30 June 2018)
- Superannuation investing: How does it all work?
- Want investments that help you sleep? Understand your risk profile
- Superannuation investment: What is the difference between a balanced and growth option?
- Choosing an investment option (Investment choice)
- SMSF investment: What assets do DIY super trustees prefer?
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 (for related articles, refer to Strategies 3, 4 and 5).
7. Manage level of fees, and insurance premiums
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. Insurance premiums are an additional cost of having a super account, and based on some of the evidence heard at the Financial Services Royal Commission, it may be worthwhile to check that the cover you have is suitable for your circumstances (and that you don’t have multiple insurance policies).
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.
For information on super fees, see the following SuperGuide articles:
- Comparing super funds: 10 fees and charges you need to know about
- Super fees: Top 10 cheapest funds in Australia
- SMSFs: How much does a DIY super fund cost?
- Comparing super funds: Top 20 cheapest funds for life insurance
- Comparing super funds: Top 20 cheapest funds for income protection insurance
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.
For information on the implications off retiring early, or later, see the following SuperGuide articles:
- What is the retirement age in Australia?
- Retirement Age Reckoner: Discover your preservation age and Age Pension age
- The super challenge: At what age should I retire?
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. If you’re planning to contribute these funds into a super account, then consider the annual non-concessional contributions cap, and the bring-forward rule.
For information, see SuperGuide articles 2018/2019 guide to non-concessional contributions (after-tax super contributions) and A super guide to understanding the bring-forward rule.