The Australian Financial Review recently reported on a Rainmaker study that concludes that the best time to start taking your superannuation ‘seriously’ is in your mid-thirties.

It also details that those in their 50s and 60s have the chance to double and triple their money in superannuation. Of course, this makes intuitive sense. The larger the balance, the larger the impact of compounding.

However, we disagree completely with the premise that investors should take their superannuation ‘seriously’ almost 15 years* after starting work.

We use Shani’s retirement plan and goals to work out how her retirement outcomes could vary if she started at 35 years old by ignoring asset allocation, contributions, insurances and estate planning.

It’s likely that if you’re reading this article or listening to this podcast, you have reviewed your superannuation. If you find our podcast useful, we would appreciate you sharing this with someone in your life that may benefit from this information. The only way we grow is through word of mouth and we enjoy reaching new audiences. Thank you for your continued support.

Listen to the full episode below. Alternatively, read the full article here.

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You can find the transcript for the episode below:

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.

So, Mark.

Mark Lamonica: So, Shani.

Jayamanne: So, we have an email address in the podcast notes that we ask to send comments and feedback and episode requests and questions and…

Lamonica: And I put it in articles I write too.

Jayamanne: Yeah, yeah, exactly it. So…

Lamonica: And I get sent pictures of places that you are traveling.

Jayamanne: Yeah. So, Stephen sent some great recommendations for my trip, and I actually took them on. I changed my trip around. So…

Lamonica: Are you not going? Are you going to send me another email at 7 pm on Friday…

Jayamanne: No.

Lamonica: …alerting me to changes in your…

Jayamanne: No, I extended my trip in Jordan. But anyway. So, I did that. But we get really, really lovely emails that give us a lot of really nice feedback from the podcast and articles we write, which we really love. But you got an email that was a little bit different to what you normally get.

Lamonica: The one about your trip?

Jayamanne: No. The one that asked you without veiling it too much that they were asking you to do their homework.

Lamonica: Okay. I think that's stretching it a little bit. It is a homework question.

Jayamanne: Yes.

Lamonica: You know, the ironic thing is I never did any homework.

Jayamanne: Yeah. So, now you're doing other people's. So…

Lamonica: There we go. All right. Should we get into this episode?

Jayamanne: Yes.

Lamonica: Or do you have more embarrassing things to bring up? All right. I will sprinkle in a couple of very embarrassing things about you during this episode. So, get excited, Shani.

Jayamanne: Okay. Now, I'm anxious, but go on.

Lamonica: All right. So, we are somewhat literate, and we occasionally read the newspaper. And the AFR wrote an article that reported on a Rainmaker study about superannuation. The study concluded that the best time to start taking your superannuation seriously is in your mid-30s.

Jayamanne: And it also details that those in their 50s and 60s have the chance to double and triple their money in super. And of course, this makes intuitive sense. The larger the balance, the larger the impact of compounding.

Lamonica: Which is great. You must be happy because you're under 35.

Jayamanne: Yeah. I've still got time. I can just sit back.

Lamonica: Yeah. I love articles like that. They're mostly about medical stuff.

Jayamanne: Yeah.

Lamonica: And it's like, you don't have to worry about this til a certain age. And I'm like, there we go.

Jayamanne: File it away.

Lamonica: Yeah. It's great news. Okay. So, you sent me this study, Shani. And obviously it means you have an opinion on it, which people can probably guess because we're doing a podcast on it. So, let's hear your opinion, Shani.

Jayamanne: Well, I completely disagree with the premise that investors should take their super seriously almost 15 years after starting work.

Lamonica: And by 15 years, Shani is referring to the Longitudinal Study of Australian youth, which concludes that most Australians have commenced full-time work at the age of 21. And I don't think we really need a study to tell us. It's kind of common sense. But anyway.

Jayamanne: It's good to have hard data. And you know, I think if you're listening to this podcast and have listened to Investing Compass in the past, it's easy to see where this podcast is going. The more time you take your super seriously, the better the outcomes. But it is easy to say that. We're going to go through the reasons why and use data. And we're going to use my data and put my retirement outcomes into a model to see what happens.

Lamonica: All right. So, let's start with saying that the purpose of super is to provide for your retirement. And that's it. And there are many reasons why the system is successful. The attractive tax rate and the compulsory employer super guarantee are key parts of that. The supercharger here, though, is time. And that's the time which your money is locked away and can compound. And this is, of course, not unique to super. It's key to the success for all investments. But it's especially important for super because it's linked to retirement, the financial goal that traditionally has the longest time horizon. So, I think the best way for us to illustrate this is, as Shani said, to use her situation. But we'll look at what would have happened if you started reviewing your super at 20 or four years in the future, 35.

Jayamanne: All right. So, let's start with asset allocation. And we may be about to get a lot of angry email addresses to that email address that we have in the episode notes for using this example. But we're going to use Scott Pape. And I've used this example a few times to show how important it is to get asset allocation right.

Lamonica: And we know that Scott Pape has helped a lot of people. We are not discounting that. But it is a good example of why personal finance is just that personal and asset allocation is extremely important.

Jayamanne: So, Scott Pape famously declared in his book The Barefoot Investor that Hostplus' Indexed Balanced Fund has beaten the pants of most stock pickers. This declaration led to an influx of over 20,000 members into the fund dubbed the Scott Pape Effect. Many of these investors were younger and just starting their investing journey with The Barefoot Investor. And these followers rolled their super into a fund with 75% exposure to growth assets and 25% exposure to defensive assets. This is typical or even more aggressive than most default superannuation funds. By definition, a balanced fund would be a 50-50 split between aggressive and defensive assets. But we know that balanced is mislabeled quite a lot with these investments. The split changes from provider to provider.

Lamonica: So, do you want to hear a crazy stat, Shani?

Jayamanne: Sure. Are we about to go on one of those, This Is What Grinds My Gears by Mark Lamonica?

Lamonica: Well, now I'm apprehensive about giving you my stat. But I'm writing an article which is taking me like three weeks. Maybe I'll never finish. But I looked at some stats around Aussie Super and we both use Aussie Super. But Aussie Super, one of the biggest, if not the biggest, super funds in Australia, do you know 90% of Aussie Super members are in their balanced fund?

Jayamanne: That's pretty crazy, Mark.

Lamonica: Yeah. And I guarantee that 90% people should not be in their balanced fund.

Jayamanne: Well, there you go.

Lamonica: Like by a long shot.

Jayamanne: Yes.

Lamonica: It's the same thing that you're saying by the Scott Pape effect. But yeah, it's just ridiculous. But anyway.

Jayamanne: So, maybe this will push some people to go and change their asset allocation.

Lamonica: Well, that would be a good thing. But anyway, let's go back to your boy Scott Pape. So, somebody posted his methodology or his call for going into a balanced super fund in a Facebook group and asking whether the jump was right given the amount of time she had left until she retires. And we will read the message. So, this is a quote. She said, "I'm 35 with a healthy super balance and my husband is 30 with a lot less." So, she likes younger men. "We are currently with Hostplus. We are in the Indexed Balanced option, 75% growth, 25% defensive based on the recommendation from The Barefoot Investor book due to the low fees. However, I've read/heard elsewhere in the finance world that if you've got a long time left until retirement, you should be in high growth and almost no defensive investment options. I've had a chat to Hostplus and based on my risk profile, very high, I understand the market and realize I invested for a long period of time, so we'll see many fluctuations but seek growth over many years, I should invest in 55% Aussie shares and 45% international. The net return for Australian and international shares based on the previous 10 years is 9.72% and 9.82% from the Hostplus website. Should we stay in Indexed Balanced or go with the advice from Hostplus? Thoughts?"

Jayamanne: I was really hoping you put on a voice to read that.

Lamonica: Like a woman's voice?

Jayamanne: Yes.

Lamonica: Well, the whole thing is interesting, right? A book that is not written for anyone in particular, she is questioning whether she should take the advice from that book or the super fund that she is entrusted with her money who is telling her to do something different.

Jayamanne: So, let's look at how time and risk can impact your total return outcomes. So, for this example, we're going to use Morningstar's asset allocation models. They take into account future expected returns instead of the past performance of funds. So, it is a more realistic expectation and model for investors to understand expected portfolio growth.

Lamonica: And the thing that we have that's closest to the Hostplus fund is what we call the growth model with 70% growth assets and 30% defensive. So, Shani's portfolio is closest to what we call at Morningstar the Aggressive model. So, that's 90% growth and 10% defensive.

Jayamanne: So, over multiple decades, this makes a huge difference. So, I'm 31 years old and I've got about $130,000 in my super. So, say that I never get a pay rise again…

Lamonica: Which is likely.

Jayamanne: …and my income stays the same over the next 34 years, inflation averages 2.8% and after the 15% contributions tax that's taken out on what I contribute to super, I have $18,000 net a year across employer and salary sacrifice.

Lamonica: Okay. So, we've used the future expected returns that our investment management team have put together. With an aggressive portfolio, Shani would have $3.347 million, which is $1.3 million in today's dollars. With a growth model, which is that 70-30 split that we think equates to the balanced option, she would have $2.61 million or just over $1 million in today's dollars. So, a difference of $727,000 in her future value result, and if we look at today's dollars, still over $300,000.

Jayamanne: Right. So, there's a lot I could do with that money. Let's move on to contributions. A large determinant of your retirement outcomes are your super contributions. The current super guarantee is at 11%. However, there's 2.2 million Australians that are self-employed and do not have any requirement to contribute to their super.

Lamonica: That means that if you are self-employed and do not contribute from age 20 to 35, of course, you're missing 15 years of contributions. And that, of course, will have a large difference in how comfortable your retirement is.

So, we're going to do another example. So, say you have a salary of $100,000 a year, you're contributing 11% per annum to your super, your performance is 6.7% per year, which is the future expected returns for an aggressive portfolio. You, of course, start at $0 in your super at 20. So, starting early instead of at 35 is the difference between having $832,000 or $2,430,000 in your super at 65. The earlier you start, the more work that is taken off your plate with the help of compounding.

Jayamanne: Of course. One of the beauties of super is that you can contribute up to $27,500 a year at the concessional tax rate of 15%. That means that if you have surplus cash, you can further contribute to your retirement savings in a tax effective way.

Lamonica: So, say that you contribute an extra $3,000 each year to your retirement savings from the age of 20 on top of employer contributions. Using the same scenario I just went through, when you retire at 65, your retirement balance will be $3,109,000. So that's an extra $679,000. Taking your super seriously as soon as possible is about securing your financial independence later in life. Can you make up for these contributions later in life? Of course you can. However, you'll have to contribute significantly higher amounts for the same retirement outcome.

Jayamanne: All right. So, let's move on to insurance because everybody loves insurance. There were some changes to super that meant as of 2021, insurance is no longer attached to accounts of members under the age of 25. And we know from our podcast stats that most of the people that are listening to this podcast would have initiated a super account prior to this time and likely have insurance cover if you haven't opted out. If you're not serious about super early on, insurance can riddle away the small balances that you earn. So, my first job out of Uni paid me $40,000 inclusive of super.

Lamonica: Worth every cent.

Jayamanne: Thank you.

Lamonica: I'm not sure, I didn't know you back then.

Jayamanne: Yeah. At 9.5% $3,800 was contributed to my super. And that's $3,230 after contributions tax. The average life insurance policy through super is $300 a year. But what I did was I used an insurance calculator through Rest, which was my first super fund, and it came out at $413 for three common insurances that you have within super. So that's life, total impairment and permanent disability, which some people call TPD, and income protection insurance.

Lamonica: Okay. Well, obviously, average was not good enough for Shani. So, she needed special insurance. But let's use that average price, the $300 to be conservative. So basically, what this did for Shani is the default insurances reduced your account balance by 10%.

Jayamanne: Right. So, I'm not saying that you should remove insurances from your super. It is completely based on your circumstances. I had no dependents at the time, and I still have no dependents. But my circumstances have changed as I've taken on a mortgage. And as part of my employee benefits at Morningstar, they provide all those insurances. So, death, TPD, income insurance. And this isn't the case for a lot of people.

But the point is that it should be assessed based on your individual circumstances. I have no need for these default insurances within my super. With many of us choosing to have kids later in life, it's likely that at the start of your career, life insurance wouldn't be necessary to help dependents in the event of your death. So, I modeled out the difference that it would make over a career saving towards retirement. If you took action at 25, instead of 35, it is $29,200 difference in your favor at 65.

Lamonica: Okay. So, let's talk about a topic. And it's good for me to talk about it because I'm close to it, and that is death. So, if you do have dependence, including financial dependence, that you share financial obligations with, it is the opposite situation in insurance. So, default insurances on your account are not custom to you, and it may result in being underinsured. This could leave your financial dependence without proper cover in the case of an unexpected death or unforeseen health issue. Outside of insurance, taking your super seriously at an early age also means nominating beneficiaries.

Jayamanne: Okay. So, retail and industry super funds will have a nomination of beneficiaries form. This allows you to nominate your wishes, but there are a few different types. There are two main types of nominations for superannuation, and that's binding and non-binding. Binding nominations are a legally valid nomination to a valid dependent. And binding nominations can be lapsing or non-lapsing. Non-lapsing is valid until death, but lapsing is the most common and means that it expires every three years. And this is done because there's room for circumstances to change.

Lamonica: So, let's talk about a changing circumstance. So, let's say you nominated your spouse. Well, 20 years later, you might have children, you might be remarried, you might be divorced, which should be a prerequisite for getting remarried. There's a whole range of possibilities over the decades that you have super. A lapsing nomination with an expiration date accounts for that. Once it does lapse, if it's not renewed and it turns into a non-binding nomination, there's a strong suggestion as to where a death benefit should be paid. The trustees of the superannuation fund will take current circumstances into account.

Jayamanne: And those are some of the reasons why it's important to take your super seriously. I know that if you're listening to this podcast, there's a good chance that you've already taken your finances and retirement planning seriously. It might be a good opportunity to share it with someone who has been putting off reviewing their super or doesn't know where to start. It might just give them the push to do what they need to do, as illustrating the real cost is quite a wake-up call.

Lamonica: Exactly, Shani. And obviously, share it in a nice way. Not be like, I know that you're screwing this up. You should listen to this podcast. And we encourage you to share the podcast to lots of people.

But get back on Shani's theme. Super should be taken seriously because there are a multitude of ways that your balance can be impacted early on to have outsized impacts on your retirement. We understand the Rainmaker study was to show the ages at which performance has the largest impact to super balances. The results can be misinterpreted and contribute to an already lax approach to super by young Aussies.

Jayamanne: That's right, Mark. We've recently seen what happens when super isn't taken seriously. We're living in a time where past governments have declared it good policy to open up the floodgates to super and release funds without any strict conditions of release. 2.5 million Australians took them up on this offer during the Morrison government's early release stimulus package. $38 billion was drained from superannuation accounts.

Lamonica: And those that did access their super reduced their balances by 51%. So, this tells me that it was mostly younger Australians or those that were self-employed. 75% withdrew the maximum amount available to them. And it was colloquially known as the $120,000 pizza, referring to the fact that a large amount of the money was spent on takeaway food, and it will result on average of $120,000 less in individuals' accounts at retirement. And one of the big categories was gambling. Now, of course, there is no data whether the people won a lot of money gambling that money and are now on a yacht somewhere.

Jayamanne: Pretty good guess at what happened to that money. But it is important for younger Australians to change their perception of retirement. It is difficult to see it as your money when you're not able to access it for multiple decades. However, in all of the cases that we've shown above, paying attention early makes a marked difference to your outcomes. The combination of all of the factors above means the impact will be multiplied. Taking super seriously is viewing it as an enabler of financial independence in retirement.

Lamonica: All right. Well, there we go. And one thing, Shani, that's not a gamble is listening to Investing Compass every single week.

Jayamanne: Great plug.

Lamonica: I know. It just came to me, you know. And also, we would love it if you shared it with your friends and rated it and left comments in your podcast app. So, thank you very much for listening and listening to Shani rant about why you should take super seriously from the minute you were born.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)