Many of us have been working as employees since we left schools or colleges and make contributions to our superannuation funds (if joined) to prepare for retirement when the time comes. Some think that the receipt shall be enough for basic life style plus some holidays; while others think the opposite and thus they may need to do something NOW in addition to the minimum contributions.
According to Alister van der Maas, managing director of Russell Investment in New Zealand, that
if people wanted their pre-retirement level of income to continue after they quit the workforce, they would have to start saving 20 per cent of their pre-tax pay from the minute they started their first job.
“If you are saving 3 per cent, 5 per cent, 8 per cent… it’s not going to turn the dial,” he said. “People need to save a lot, a lot more than they think, a lot more than they are. Whatever you’re saving, it’s probably not enough.”
So what do these financial specialists advise to get your superannuation working harder for you? Here are their tips and I’ll discuss 3 of them:-
- Pick the right fund – investors shall invest in funds according to their risk profile largely based on age. It’s common advice that younger age are more tolerant to volatility and thus should be investing in growth funds; older age are closer to retirement and in need of cash and therefore they should be in conservative funds;
- Increase your contributions – as soon as you can AND as much as you can;
- Check your fees – high fees eat away your gains and can add up very significantly in long run
- Pick the right fund – the model sounds right in theory (ie younger investors pick growth funds; and older investors pick conservative funds), however does this really work? Just because you are young it does not mean that you can “blindly” buy high and hold when the share markets start to free fell; and then you hold and wait till they rebound; alternatively just because you are 50 and the share markets are starting to rebound, do you still stick to the model advice that older investors shall stay in conservative funds?
- Increase your contributions – I don’t quite agree with that, not only because the returns from superannuation funds or managed funds are generally pretty low, but because this “sales pitch” – a) blinds employees away from other better investments; b) ties up employees paychecks with the superannuation till retirement; c) has no reserved capital and investment guarantee; and d) returns too slow and too little due to “saving” instead of “investing” nature;
- Management fees – although index funds are generally charging way lot cheaper than active-managed funds, they still eat away investors gains significantly in long run. However investors shall note that just because the fees are low it does not necessarily result in an increase in investment gains
The advice from the financial specialist are merely general solutions to problems on surface – the target to save at least 20% of pre-tax paycheck if employees want to have pre-retirement level of income after they retire. We all note that it’s quite difficult to save the 20% to the superannuation from our paycheck; so the advice from the specialist, theoretically, can at best help reduce the amount of contribution while in the long run, can achieve the best returns when certain ideal conditions applied.
Although it’s difficult to “save”, we are still better off to carry on our contributions to the superannuation. The advice to increase contributions to the superannuation in order to boost the returns, however I just cannot agree. I believe that if employees are better educated financially, they are able to find ways to maximise the returns for their nest eggs. Knowing that superannuation funds are not the best investment tools, employees are able to invest their hard-earned money with something else. These can include but are not limited to shares, bonds, options, futures, FX, ETFs, commodities, and properties.
Also note that in this blog the superannuations are not compared against other managed funds or investments; it just simply points out the facts that investors have alternatives to superannuation and may therefore achieve the same or even better results for their retirement. Instead of increasing contributions (at least 20% pre-tax pay), lotto-picking the right funds that’s conditioned by investment companies, paying management fees to the firms regardless of the portfolio values up or down; there are abundant of investment tools available for employees to choose. However all these can become a reality ONLY when the employees are financially educated, have investor mindset, take action, review and self-correct.