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SUMMARY: If your kids still listen to you … here’s what you need to tell them to do with their super.
My son is 10. He still listens to his dad. Mostly.
He knows his dad is a financial adviser who “helps people with their money”. He understands that includes investing in “stuff”, including property. For a kid not yet receiving pocket money, there’s not much point going into more detail.
“Dad, will you help me with my money when I grow up?” he asked around his 10th birthday. My eyes got a little teary.
I did try explaining superannuation once, as basically as I could. As much as he tried to care, it was a step too far for a 10-year-old.
For the “average” reader, there’s a good chance that your kids are past their teens, into their 20s and 30s, possibly even 40s.
There’s an even better chance – because I see enough of that age cohort to know – that they haven’t really paid much attention to their super at all.
At best, they might have listened to the “consolidation” argument and dragged all of their super into one fund. As I pointed out recently, this can be disastrous from an insurance perspective.
When it comes to superannuation, there are really only three things that young people need to understand. Yep, three.
We are talking here about your kids, who largely don’t have enough in super yet to consider an SMSF. They belong in an APRA-fund (everything else except for SMSFs). Whether that’s an industry fund, a corporate fund or a retail fund is a discussion for another day.
If this is your kids … this is your reminder to talk to them about their superannuation. (Or to give them a copy of this column.)
The three things that young’uns need to know about their super are:
- Get the super funds invested correctly.
- Get more into super earlier.
- Get the insurances you need inside super.
Get the super fund invested correctly
The education here starts with a basic discussion about the four main assets that all super funds are invested in.
Table 1: The asset classes of super.
Cash and fixed interest are “defensive” assets. They are predominantly about producing income. Cash only produces income, while the capital is not at risk (unless banks start collapsing and government guarantees fail).
Fixed interest investments, while predominantly about income (called coupons) do have a capital element to them. They are, essentially, loans to governments and large corporates. And the value of the “loan” can fluctuate before maturity, according to the health of the borrower, interest rates and the health of the economy.
Property and shares are “growth” assets. Yes, property produces rent and shares pay dividends, but they are predominantly assets where you are hoping that the underlying value increases. Basically, that a property doubles in value from $500,000 to $1 million over time and BHP shares double from $25 to $50. (Just keeping it simple for now.)
Generally, default super funds are going to be “balanced” funds, that have, roughly 60% in growth assets and 40% in income assets.
Is this right for young people, with not much in super and two, three or four decades of growing their super before they can touch it?
No. Probably not.
You should encourage your kids to do a “risk profile” that will help them to understand their comfort with risk. But whatever their risk profile turns out to be, they should be encourage to put a higher amount of money into risk, or growth, assets.
Why? Because those assets are, over the longer term, likely to provide better returns, as per the graph above.
If switching from “moderate” to “moderately aggressive” provides an extra 1% in returns a year, then switching at age 30 will probably add about 50% to their super fund balance by age 65.
If they are “balanced” or “moderate” investors, they should be encouraged, depending on how young they are, to switch from 60-40 funds to something with more growth assets in the mix, such as an 80-20 fund, or possibly even more aggressively than that.
Get more into super, earlier
Previous generations – yes, I’m talking to you – were able to put very large amounts of money into super.
Prior to 2007, older Australians could put in a little more than $100,000 per job. If you had multiple jobs, such as being a director or employee of many companies, then you could put in multiples of this figure.
When these older people got into their 50s, they could literally shovel money into super. The kids were off their hands, the mortgage was paid down. And they could put large sums into super, thanks to massive aged-based limits.
This was wound back to $50,000, then $25,000. And, for the last few years, there have been limits of $30,000 for the under 50s and $35,000 for the over 50s.
As of 1 July this year, we are all limited to $25,000 a year.
My generation and those that follow, won’t have the same opportunity to shovel money into super when the mortgage is paid down and the kids are off our hands. We’re going to be limited to $25,000 a year. (This will rise with inflation, but we’re talking about being limited, forever, to $25,000 in today’s money.)
The only way to beat that will be to start putting money into super earlier. I’ve said for many years, that this probably means from about your late 30s, or early 40s.
That now has to come back to early- to mid-30s. It doesn’t have to be loads, but it does need to be a sacrifice. We’re going to have to make the sacrifice earlier, because we won’t be able to load up into super in our 50s, like our parents did.
A few thousand dollars a year. Perhaps $5000 a year (about $100 a week). More if possible. But it has to start earlier. It’s a small sacrifice to make now, because when we really want to contribute, and have the ability to do so, we’re going to hard up against that $25,000 a year limit.
Get the insurances you need inside super
There are four different types of insurance – life insurance, total and permanent disability, trauma and income protection. I don’t have space to go into them in detail here.
Three of those can be purchased inside superannuation – life, TPD and income protection. I don’t generally recommend income protection is purchased inside super.
My first preference is for all insurances to be bought outside of super. But this is usually not a realistic, cost-affordable, solution for most young people.
Getting the life and TPD insurance that young people need inside a super fund is something I generally recommend. It’s tax efficient, because the premiums are deductible to a super fund (where the premiums are not deductible outside of super).
Yes, it eats into their super. But you can pay for these premiums by making tax-effective contributions to superannuation via salary sacrifice.
This has been made even easier since 1 July, because Australians can now make their own tax deductible contributions to super at any time they please. An earlier column has some more detail on how these rules have changed to make it easier for individuals to contribute, tax-effectively, to super.
There you go. The three things youth need to understand about their super. If you can’t talk to them about it, at least get a copy of this column in front of them.
*****
Superannuation suffers from two image problems for young’uns. The first is that it’s perceived as complex. The second is that the rules constantly change.
These two things ideas need to be dealt with.
Superannuation is not that complex to understand. Essentially, it’s your money. You just can’t touch it for a while. But when you can get it (at age 60 or 65), don’t you want it to be as big as it possibly can be?
The “constant change” issue is irrelevant to “kids”. Most don’t have any choice about super – they’re going to have it whether they like it or not. Their 9.5% superannuation guarantee payments will continue to go into super. It will eventually rise to 12%. They need to get a grip and pay some attention to it.
The rules will change 1000 times before a 30-year-old gets access to their super. But the one that won’t change – it will always be a more tax effective way to save for your retirement than probably any other vehicle.
So, take 15 minutes to understand what you need to know about super. Implement it. Or speak to a financial adviser and get them to do it for you.
*****
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.