CalculatorMy wife and I received our superannuation statements in the mail yesterday. Considering how bad the current economic climate is, I wasn’t expecting the best of returns.

So I wasn’t too surprised to see that the fund had returned -0.35% on my wife’s investments and 1.9% on my investments.

Whats Superannuation

Before I go any further many of you will be wondering what’s superannuation? Well, I’ll tell you – Superannuation (super) is Australia’s compulsory retirement savings plan. It’s similar to (but much worse than) the 401(k) in the USA or the Registered Retirement Savings Plan in Canada.

Essentially any business that employees someone in Australia is forced by the government to take at least 9% of that persons pay and put it into their super account, this is called an “Employer Contribution”.

Individuals can also add any amount they wish into their super account with the advantage of being taxed at a smaller tax rate.

 

The good

All Australians who are currently employed will now retire with at least some money to go towards their retirement. This means that there will be less of a burden on the tax payer, as less retiree’s will require the pension. I guess if you can come to grips with the government having essentially complete control over your retirement finances, then super is a good thing for the majority of people.

I understand that for many people saving money can be difficult, and I suspect that this is a large part of the reason why compulsory super is still in existence today.

 

The bad

My biggest issue about forced superannuation (other than the fact that its forced, and we are supposed to live in a free democratic country /end rant) is that you can’t access these funds until you are of retirement age, or you have some other life event like a terminal illness or a major disability.

The second major problem I have, is that you are capped in how much you can withdraw from your super once you’ve retired. I’m not sure what the amount you can withdraw is, but if I retire with a cool $1 million in my retirement fund, I don’t want the government blocking me from withdrawing my own money – What a joke!

For someone like me that feels like they are perfectly able to proactively manage their own finances, this feels like a gigantic slap in the face. The compulsory super law was introduced about 20 years ago when I was in primary school. Therefore every job I have been employed in has withheld at least 9% of my income to contribute on my behalf towards my super account.

Why is the government introducing a cap on the amount people are able to withdraw?

Well it turns out that people were retiring, and then spending their entire allotment of super within the first couple of months. Then after they had exhausted all of their savings, they went onto the pension.

 

The rest

To be fair, I understand why the government imposes these restrictions on the population, I just wish there was some kind of means test to determine if you are capable of making sound financial decisions.

So far I have managed to accrued about $70,000 towards my own retirement super fund. This is despite the GFC and the last 4 years of terrible investment returns. The majority of the $70,000 is due to the 9% employer contribution I spoke about earlier.

Considering how poorly the superannuation fund has been performing, I would have been better off having my money sitting in my own bank account earning 4.25% interest PA, or in bonds yielding 4.7% interest PA. Or better yet, against my mortgage which is sitting at 5.25% interest PA.

I’ll admit that I don’t know a great deal about the American 401(k) system, but from what I’ve read, it sounds a lot better than the Australian superannuation system.

 

Why I don’t trust the Australian Government

When my parents entered into the work force, they did so expecting the retirement age to be 60. Since then the retirement age has been raised not once, but twice (currently 67) and I continue to see articles like this one which want to push the retirement age out to 70. Even since I have been working (about 10 years now) the retirement age has been increased from 65 to 67.

I fear that no matter how long I work, I will never get a chance to access my super funds. I imagine the government will continue to shift the goal posts to meet their own agendas, forever dangling the “super carrot” in front of me.

 

My Options

Over the last couple of years (particularly since the GFC) there have been a lot of people expressing their concerns over how poorly the super funds are performing. This has given rise to people being able to “self manage” their super funds (Australian Government – Self Managed Super). Unfortunately there are not very many firms that offer this service, and the ones that do normally sting you with huge fees for the privilege.

I have considered managing my own super accounts without gong through any of the big firms, but the amount of work involved in meeting all the government regulations is a little too time consuming for something I can’t directly access for at least the next 30 years.

 

My Next Steps?

I have ended up migrating all of my super into “safe” options, things like bonds and super fund controlled savings accounts. Unfortunately the best interest rate they offer is only 4.5% PA, which is still far better than the negative return my wife received and the 2% I picked up.

As a simplified example I put together a table showing the amount of money I will be missing out on simply because of the poor interest rates available at my super fund.
Assumptions – no tax, no fees, constant interest rates and constant employer contribution of $9,000 (which is fairly close to what it is now), no CPI or inflation calculations.

Starting Money

Employer Contribution PA

Interest Rate PA

30 Years Later

$70,000 $9,000 4.5% $811,235
$70,000 $9,000 4.7% $845,691
$70,000 $9,000 2% $491,908

I know its not entirely accurate and has a raft of assumptions, but it does show the significant difference a few percentage points can make over the rest of my working life. Even though I’m not getting the 4.7% interest I could get when self managing my super, I have moved up from the 2% I got last year, so hopefully things can only improve from here!

 

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Thanks Glen