A recent Vanguard study showed that the best way for investors to take action with their super is to show them the actual difference it would make to their retirement outcomes. We run you through the steps that you can go through using a free, Moneysmart tool to model your own circumstances. You can find the tool here, or search for 'Moneysmart Retirement Planner'.

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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.

Mark LaMonica: So, as always, you've been busy, Shani. You've been attending a lot of events recently.

Jayamanne: You're making them sound really fun.

LaMonica: Okay. Well, I didn't mean to imply this was like the netball or something, like to hear industry events about investing.

Jayamanne: Yeah.

LaMonica: But you got an article idea, which is always good because it's hard to come up with ideas.

Jayamanne: It is.

LaMonica: So, that was worthwhile.

Jayamanne: You get an article block.

LaMonica: Yeah, exactly. But you were asked this question at one of these events and then you came up with this article idea. So, I guess, what's the question? What's the article?

Jayamanne: Good question. So, I went to this industry roundtable and one of the questions that came up was, how do we get more younger investors engaged with their super. There were a lot of different answers that were sort of floated around and one of them was like a rebrand of super. So, calling it a pension instead of super, which I don't know if that would work on my 20-year-old self.

LaMonica: I just – I don't understand why pension is more exciting than super.

Jayamanne: Well, I haven't told you this part. It was suggested by an American who said that they use pension over there. I was like, are younger people more interested in their retirement savings there.

LaMonica: But like nobody in the U.S. gets a pension. Like you get a pension if you are – like, they basically all have been abolished. So, there are still people that are collecting pensions, but like it's not like 20-year-olds in the U.S. are starting a new job and they're like, here's your pension plan, work here for 50 years and then you get like 13 bucks a month.

Jayamanne: Well, there you go.

LaMonica: It's an important lesson not to listen to Americans.

Jayamanne: Yes, yes. But I think, there were plenty of decent pathways that were put forward to engage with younger investors and younger people with their retirement savings. But lucky for me, I received an email from Vanguard the next day and they had already done the hard work for me. And they did a study, and it reveals that the jolt that people needed to engage with their super was to understand the consequences of not engaging.

LaMonica: Yeah. I mean, I try not to think about the consequences of anything I do, but I do see why that would work. So, the survey focused on fees in super and the impact of those fees on retirement savings. So, it found that half of Australians say they've never switched their superfund. However, laying out the potential savings from switching superfunds would cause 72% to consider taking action. So, the potential savings shown to these participants included an analysis showing a lower-cost superfund could save a typical full-time worker around 12% of their super balance, which would be $100,000 by retirement.

Jayamanne: That's big money.

LaMonica: Yeah. I mean – so yes, I guess, promising somebody $100,000 more is...

Jayamanne: Will get me to fill out a form.

LaMonica: Exactly. Exactly.

Jayamanne: Mark and I actually ran through a model. We went to an event together. We presented at a conference.

LaMonica: Yes.

Jayamanne: The Asset Allocation conference, the Sixth Annual.

LaMonica: Do you want to say how we got to that event?

Jayamanne: I don't know what story you're going to tell.

LaMonica: You got asked to be to present at the event…

Jayamanne: And I said, I don't want to do it alone.

LaMonica: Yes. So, then you made me come.

Jayamanne: I had my support person.

LaMonica: Yes. I'm like a dog just with less training and less money has been invested in it as like a seeing eye dog.

Jayamanne: But we ran through a presentation and a model at this conference.

LaMonica: That's true. That did happen.

Jayamanne: It focused on the majority of Australians who don't engage with their superannuation and stay in that default fund, even if it is an optimal for their retirement goals. So, 90% of AussieSupers members are in that balanced fund option, which has more than 24% of the fund in defensive assets.

LaMonica: I find it shocking. But anyway, I guess, I'm easily shocked with stuff like that. And we, obviously, can't speak for any individual investor that's in that balanced option. But I think we can definitely say that 3 million people, because AussieSuper is obviously really big, 3 million people are in balance. And a good deal of them probably shouldn't be. And they shouldn't be because it's not going to get them to their retirement goals.

So, the model show, the model that we presented at this conference, show that over the last 10 years, the high growth option from AussieSuper has delivered annualized returns of 9.04%. The balanced option has delivered returns of 8.07%. If we extrapolate those balances out for an investor contributing $10,000 a year into super for 35 years, the investor in the balanced option would have $1,750,000. The high growth investor would have $2,000,176. And as you probably guessed, that is almost 25% more in retirement savings.

Jayamanne: And that's a small change, especially if you do it when you're younger, it can mean a more comfortable retirement. I've written on this before and we've done a podcast on this before. It's called Why You Should Take Your Super Seriously Before 35.

LaMonica: …which was less relevant for me.

Jayamanne: But I feel like you would have taken your super seriously from the get-go.

LaMonica: I mean, that's true. And 35 is about when I moved to Australia.

Jayamanne: Well, there you go. But in the article and podcast, I did look at the difference to my retirement outcomes if I took my super seriously in my early 20s instead of my 30s and looked at minor alterations. So, that was insurances, asset allocation, and fees.

LaMonica: When did you start taking your super seriously?

Jayamanne: Probably when I started full-time work.

LaMonica: So, like right out of uni.

Jayamanne: Yeah.

LaMonica: But you were not taking it seriously because you had a couple of jobs before that, like casual jobs. You did not take it seriously there.

Jayamanne: I didn't really. I knew it was going in and it always checked my pay-check to make sure that it was going in. But had no idea about asset allocation or anything like that.

LaMonica: So, those two weeks that you worked at Grill'd, you did not …

Jayamanne: They didn’t pay me super.

LaMonica: They also fired you.

Jayamanne: I quit. I quit.

LaMonica: That's really the story I've heard. But anyway, we obviously, don't want investors to think that they need professional intervention to create a more comfortable retirement, especially as we all know, or at least we know, that financial advice is very expensive, that flat fee financial advice. That's really out of reach for a lot of people that have those lower balances. So, these hypothetical scenarios have been written about a lot, Shani. But we want to embrace the Vanguard results. And investor circumstances within the projection could create the motivation to optimize your retirement savings.

Jayamanne: And I can speak about myself here. I think going through my retirement savings and going through this exercise where I modeled out the differences in my scenario and my retirement savings only strengthened my belief in the investment strategy and effort towards my retirement goals.

LaMonica: Yeah. I mean, I'm the same. I played around in an Excel spreadsheet to work out the goals of my portfolio, how compounding would work in my favor, how I could create a sustainable passive income stream for myself. So, we're going to go through the same homework for investors in this episode. And we encourage each of you to just use your circumstances in the model that we will run through.

So, first, we strongly encourage you to figure out how much you need for retirement. We'll put a link to an article version of this exercise in the podcast episode notes. You'll find the link to calculate how much you need to retire in there.

Jayamanne: And then we're going to use a free tool from MoneySmart, which is a government website. And it's called the MoneySmart Retirement Planner. So, just Google that and it should come up.

LaMonica: And the nice thing. You don't like it as much as paycalculator.com, but it's up there, right?

Jayamanne: It's close.

LaMonica: You're a big fan of MoneySmart.

Jayamanne: Yeah.

LaMonica: I think the nice thing, like making fun of Shani aside, the nice thing about tools like this is you can go in and just adjust all these variables to understand how your circumstances may change. So, you can adjust the contributions, the fees, the rate of the return and how changing your salary sacrifice amounts. A lower fee fund or adjusting your asset allocation will change those retirement outcomes.

Jayamanne: So, before we get started, do you want to just go through what this all means and why you need to conduct exercises like this, Mark?

LaMonica: Why not? So, obviously, the issue with superannuation funds is they can't be personalized for each member and their goals unless, of course, it's a self-managed superfund. So, the fund you're in, the insurance you're enrolled in, and the fees that you're paying have not been designed for you and your unique circumstances. So, the superfund has created profiles that you can elect that best match your situation. It's likely that if you've never reviewed your super before, you would be in the default superfund where you haven't even selected that profile.

Jayamanne: And asset allocation is one of the biggest changes that you can make. And this is choosing between the funds that may have names such as balanced, gross, aggressive, et cetera. We've spoken about how asset allocation is my biggest focus and how it will have the largest impact on performance. I focus on asset allocation far more than the actual individual investments that I hold within my portfolio.

We can go through all of the variables in the retirement planner and how to figure out what is right for you. But we've done an episode on my focus on asset allocation. It's called Chinese Investment Strategy. So, you can go and have a listen to that. All right. Mark, why don't you take step one with the calculator?

LaMonica: Okay. So, step one is filling out the calculator with your current situation, which should be easy, right.

Jayamanne: You need to log into your super to do this to figure out what you have.

LaMonica: You have to do that first of all. Who knows more about you than you, right? So, the calculator allows you to elect whether you are single or partnered, which you should know. Compare the number to the number you got from how much you need in retirement. So, in the advanced settings, you're able to adjust the fee level and your investment return. So, enter in the fee levels of your fund and the investment return over the past 10 years.

So, past performance, we say this all the time, past performance is not a reliable indicator of future performance. But we can use this historical data as a relative comparison point between different fund options. But remember, we said 10 years go as far back as the superfund is publishing. We don't want to use short-term.

If you do want to use a forward-looking option, Morningstar has projected returns for different asset classes and different portfolio mixes. It is available, unfortunately, only for Morningstar Investor subscribers or trialists, but that's free. You can take out a trial for four weeks. And you can find that in the investment policy statement feature.

Jayamanne: All right. So, why don't I take step two and that is adjust the variables to reach your retirement goals. So, there are a few levers that investors can pull to reach a financial goal. The first is time. So, you can always push back retirement to a later age to achieve your goal. The second is contribution. So, contribute and save more for your retirement by maximizing concessional contributions. So, those are your pre-tax contributions. And there are two main types of contributions, concessional and non-concessional, that concessional contributions have an annual limit of $30,000. Non-concessional has an annual cap of $120,000.

So, these contributions have already been taxed at your marginal tax rate, so they don't have a contributions tax upon entry. So, for example, if you salary sacrifice $1,000 into your super, you'll pay $150 in tax and you'll have $850 going into your super account. If you earn $100,000 a year, your marginal tax rate is 30%. Your effective tax rate is 23.8%. And this is what you'd be paying on any contribution going into the fund if it's a non-concessional contribution.

So, you can see that especially for high-income earners, it's a very attractive proposition. So, I think there's also some information there on another tool through MoneySmart, which is a Superannuation Optimiser. What this tool does is it looks at the best-case scenario between contributing to super and saving on tax.

And then, there's one last lever and that's returns. So, when you invest, you're exchanging risk for return and risky assets tend to provide higher returns. So, investing in a more aggressive asset will provide higher potential returns.

LaMonica: That was nice of you to take the very long step.

Jayamanne: Yeah.

LaMonica: My step was shorter, although I have to…

Jayamanne: I don't want to get fired again, you know.

LaMonica: Fired again. Wow. Okay. We won't go into the full Grill'd story, but everyone out there…

Jayamanne: I didn't get fired.

LaMonica:… everyone out there should know she did not tamper with the food. She was (indiscernible), you were a greeter.

Jayamanne: I was a greeter, yeah.

LaMonica: Anyway, step three. Review the fees as we've been talking about. So, fees and insurance. Other determinants, of course, of your return are the costs because they detract from them. So, the main things that detract from those returns are, of course, the fees and any of the insurance options that you're in. But just remember that fees can be a huge drag on your return.

Jayamanne: And the ATO does provide you'll a super comparison where you can compare the fees of your funds to other funds on the market. You can use these fees as comparison point in your own model and adjust the fees in the advanced settings section.

And we're wary about sending investors there without the additional context from step one and two. The website does give a high-level comparison with fees and performance. Different funds do have different objectives and invest in different assets that attract different costs. So, of course, they're going to perform differently. So, ensure that you're comparing funds apples-to-apples.

LaMonica: Okay. I know you're very passionate about insurance.

Jayamanne: I don't know where you get this idea.

LaMonica: You've written like five articles on insurance in your super. Are you telling me you're not passionate about everything you do at work?

Jayamanne: I'm passionate about everything that I do at work, Mark.

LaMonica: There we go. Were you passionate about greeting people at Grill'd?

Jayamanne: No. I'm very introverted.

LaMonica: I know. It's a weird job.

Jayamanne: Yeah. I was at uni. I needed the money.

LaMonica: You also love to cook, so you should have been back cooking. So, Shani, luckily there's only three steps. Even though you had to do the long one, I did two of them. We have reached the end. So, what have people done?

Jayamanne: You've basically completed a superannuation check to optimize your super. And understanding the difference you can make to your retirement outcomes through some tweaks, but there are some caveats to this. This is a point in time snapshot over the course of working life. Your contributions will hopefully change as you start to earn more money. Inflation will fluctuate, markets will fluctuate, fees will change. So, there's a lot going on.

LaMonica: Yeah. But obviously, all of those are not a reason to not do this exercise. So, it just demonstrates that a comfortable retirement requires you to pay attention. So, it's worth it. You have a friend, family member, a colleague that you think could do with potentially increasing their super balances at retirement, which I think would be everyone that you like, unless this is like an enemy that you don't want to have more money in retirement. As we talked about, this could increase the amount of money you have in retirement by 25%. So, please share this with them and share any thoughts you have with us.

So, send me an email. My email is in the show notes. We hope that you go through this exercise. We'd love any feedback on people that have gone through this and any potential changes they'd make. So, thank you very much for listening.

 

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