Mention superannuation and most people go into a stupor. Super may be important but it's something most of us prefer to stick away in the bottom drawer while we get on with the here and now.
But unless you're planning on getting run over by a bus tomorrow, it's worth giving your retirement planning a little TLC.
After all, if you're intending to retire one day it makes sense to have your retirement money working its socks off. Here are 10 ideas to get started.
Consolidate your super
There are more than 24 million super accounts in Australia and you don't need to be Einstein to work out that's a lot more than one for each working person.
The Federal Government is obsessed with letting us choose our super funds but Anna Booth, the chairperson of the Australian Preservation Fund, says it needs to get serious about helping people consolidate their super into one account.
Having multiple accounts generally means paying multiple fees and possibly having part of your savings in a lesser fund. Unless there's a good reason to stay such as hefty exit fees choose a fund with low fees and good performance and ask it to transfer your other accounts across.
Paul Maddock, the general manager for investment and marketing services with MLC, says older people with super relating to pre-1983 service may also be able to get a tax advantage by consolidating because the lower taxes on the pre-1983 component will apply to the merged benefit.
Watch the costs
Charles Littrell, the executive general manager for policy research and consulting with the Australian Prudential Regulatory Authority, says preliminary research into the past seven years of quarterly data for the largest super funds has shown there is little relationship between risk and returns. He told the recent Association of Superannuation Funds of Australia (ASFA) conference that in many cases the higher the expenses, the lower the return.
If you're paying heaps for your super, you need to ask why. Are you getting extra benefits or just lining someone else's pockets?
A study last year by ASFA found the bulk of super fund members are in funds with costs of 1 per cent of assets or less. The average fund had costs of about 1.3 per cent.
Know where you're invested
Philippa Smith, the chief executive of ASFA, says about 80 per cent of super funds offer their members a choice in where their money is invested. This doesn't mean you can choose a different fund (the Government is still working on that one) but it does mean you can choose an investment strategy that suits you.
With most funds reporting losses in the past year, super funds report that some members are concerned about their level of exposure to the sharemarket. But they stress super is a long-term investment for most people, and those who have a knee-jerk reaction and move to more conservative assets could be dudding themselves in the long term.
The graph (top right) was put together by Brett Elvish, the executive director for asset consulting with InTech Financial Services. It shows the money accumulated in super (and retirement) for someone who contributes $10,000 to super at age 30 then receives the 9 per cent compulsory super contributions up to retirement. It looks at the effect of different investment strategies using InTech's estimated returns for the coming decade (which are lower than those of the past 10 years).
As you can see, a high-growth strategy (85 per cent in shares and property) generates a much larger benefit than a conservative-growth strategy (25 per cent in growth assets). Even more importantly, that benefit should be sufficient to last through retirement.
"If you expect the returns to be higher from shares you have to take a long-term view," says Elvish. "A negative return is actually a validation of an appropriate long-term investment strategy rather than signalling a problem. It's the normal thing you should expect if you're taking an appropriate allocation to growth assets."
In many cases, funds offer age-based investment options where your exposure to riskier assets is reduced as you get older. This may offer a level of comfort for those approaching retirement but again it's important to know what you're getting.
Elvish looked at the age-based options in five super funds and found that for a 50-year-old male the exposure to growth assets ranged from 25 to 70 per cent.
"To me, that sends a clear message that, while age-based options may be a good strategy, there's a question of whose option you take," he says. "It's very hard to make generalisations but, unless you're terminally ill or have other constraints, it would generally be inappropriate to have only 25 per cent in growth at 50 when you may still have another 35 years to live."
But it's also important to differentiate between taking an active approach to your super and tinkering.
Roger Urwin, the global head of investment consulting with Watson Wyatt, told the ASFA crowd how super fund members monitor their portfolio makes a big difference to the decisions they take.
He says US research has shown the more you look at your account balance and tinker with it, the worse the performance gets. Those who do best tend to ignore their account balance. "That's not saying you shouldn't be planning but you need to ensure it's intelligent planning," he said.
He said one of the reactions to poor investment returns in the US has been for people to use more investment options. "But you can't say they have any real strategy."
Keep it safe
The Government recently announced it will do its bit to improve the safeguards on super by requiring all super funds to be licensed and to implement a risk-management plan.
APRA's Littrell says funds will need to apply for a licence by October and all funds should be licensed within two years.
First cab off the ranks will be the larger funds that are open to the public, followed by new funds and those that have been identified as being potentially problematic or risky.
But fund members can do their own bit by keeping a closer eye on their money. Knowing who is looking after it, and where it is invested is a good start.
DIY?
Lesley East, an assistant commissioner for superannuation with the Australian Tax Office, told the ASFA conference the number of self-managed funds has grown by 25 per cent since the Tax Office took over regulating them three years ago.
Maddock says many people are attracted to DIY because they want greater control over where their money is invested. But he points out that many discretionary master funds now also offer members the opportunity to invest in assets such as direct shares or geared investment funds.
Super funds can't borrow but, Maddock says, self-managed funds and some discretionary master trusts allow you to invest in internally geared products such as geared share funds and warrants. As with borrowing to invest yourself, this increases the potential return on your investment but also the risk.
Investors are also increasingly looking to use their self-managed funds after they retire. So long as the trust deed allows it, you can pay yourself an allocated or complying pension in retirement and gain all the accompanying tax advantages. (More about these later.)
Maddock says self-managed super funds are also able to pay complying pensions that are backed by investments in growth assets such as shares and property so long as they have an actuarial certificate stating that the assets will be sufficient to meet the pension liabilities.
Most publicly offered complying pensions are backed by fixed-interest investments so they tend to provide fairly unattractive returns.
Maddock says the appeal of a complying pension is that it is subject to the pension reasonable benefit limit (which means you can accumulate a super benefit of more than $1 million without losing the super tax concessions) and you may be able to qualify for some social security benefits as these pensions are exempt from the assets test.
Be flexible
Stanley Fischer, a vice-president with Citigroup, told a recent superannuation industry conference that the "official" retirement age of 65 was introduced by Bismarck in Germany in 1880. At the time, the average German life expectancy was 45.
That doesn't mean we should keep working to 100 (or even 65) but it does demonstrate there's room for change on how and when we retire.
Urwin says he has been hearing a lot about cases in the US where investors have put off retirement due to the investment losses incurred by their retirement savings funds.
But having that sort of flexibility doesn't just work in the bad times the ability to work longer or to phase into retirement also gives you longer to save and benefit from better investment markets (whenever they come).
Maddock says people often don't realise they may be able to contribute to super after age 65 in Australia. He says even if you've retired and bought an income-stream product, such as an allocated pension, you can roll the money back into a super fund if your circumstances change and you decide to go back to work.
Maddock says retirees can give themselves further flexibility by putting in place measures to help protect themselves against poor investment markets in the early years of owning retirement-income products.
One popular strategy is to have two years' worth of income payments in a cash fund within the pension so that you don't have to immediately draw down on your investments to live on.
Another is to have part of your money in an annuity so that your essential expenses are covered and you can wear some variation in the income from the rest of your super benefit.
Pre-retirement top-ups
The big advantage of super is that it is a long-term investment and benefits substantially from the effects of compound interest but the reality is that many people don't have a lot of money to contribute until they're closer to retirement. However, Maddock says, there are ways pre-retirees can boost their retirement benefits.
Many retirees, for example, make large undeducted contributions to super before they retire. These contributions are not tax-deductible but, Maddock says, they get money into the super system where it can be used to purchase a retirement-income product such as an allocated pension. As there is no tax on the earnings of pension funds, your money grows tax-free. Your contribution is regarded as capital so you pay no tax as you draw down on it to live on (although you may pay tax on other withdrawals from your pension).
He says if you are self-employed or not receiving employer super but eligible to contribute, you can make a big tax-deductible contribution to super before you buy your retirement income stream.
You might, for example, sell an investment property and contribute the proceeds to super. Your investment dollars can grow tax-free although you'll be taxed on the income you draw down from the pension.
Share with your spouse
Maddock says couples should aim to retire with two super payouts as each individual is entitled to receive the first $112,405 tax-free. They are also each entitled to their own reasonable benefit limit, which determines how much you can take out of super on a concessionally taxed basis.
He says it is already possible for individuals to make contributions on behalf of a non-working or low-earning spouse, and the Government has said super contributions will be able to be split between couples from July.
A popular strategy for those nearing retirement is to make large contributions for their spouse to generate two retirement income streams sometimes by cashing out part of their own super benefit to make the contribution.
Rev up the risk
This won't suit everyone but Urwin says there is an argument that younger, financially secure fund members can afford to take more investment risks with their super than the average individual.
This strategy should only be attempted if the member has the ability to forgo consumption and save like crazy if the investments go wrong.
"It's a holistic view looking at how much they can `flex' and still end up where they want to be."
Be tax smart in retirement
MLC's technical services manager, Paul Sarkis, told the ASFA conference that Australians have more than $43 billion invested in retirement-income products. They're not the only option for getting the most out of your retirement dollar but they have some attractive tax advantages.
First, says Maddock, they don't pay tax on their earnings so your money can grow tax-free. Most income streams comprise a "deductible" amount, which is tax-free and, so long as the pension was purchased with super money that did not exceed the member's reasonable benefit limit, there is a 15 per cent tax rebate on the other income received each year.
This allows retirees to generate higher levels of after-tax income than other members of the community.
Another option is to invest outside the super system and take advantage of income splitting and the tax-advantaged income from assets such as fully franked shares.
Each week financial advisor Noel Whittaker answers your
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