MC HAMMER'S HIT SONG of the early 90's resonates when thinking about the main reasons people resist investing into their superannuation.
Whilst being in control of your own super (through an SMSF and especially properties in an SMSF) has helped alleviate this somewhat, let's take a look at the rational or irrational fears behind 4 of the bigger resistances:
- Markets will crash
- Rules will change
- Fees and charges
- Can't touch it
With the "U Can't Touch It" (until retirement) resonating as one of the biggest fears of them all.
Comparing the Options
Let's take the time to initially go through each one in brief, before compiling a case study addressing all of the issues listed above.
- You pay $0.40 cents in the dollar tax and salary sacrifice into superannuation, which is taxed at the much lower rate of 15% and the market crashes at 20% - So why do you feel bad about it?
- A super pension taxed at zero percent is too good to be true, rules will change and so too will the 15% concessional rates. So will it really be worse than money held outside of a super? What about making some serious hay whilst the sun still shines?
- Fees and charges consume the profit. Bullocks blame yourself, there are so many extremely low cost superannuation offerings that the only fault for high fees and charges lies with you.
- Retirement is too far away and may need money now. Really? What about the quality of life and the need for money in the future? See point 1 above; super is the fastest way to save.
Logic like in the above can often overcome fear and in the case study below, a once hesitant (and fictional) Aaron and Linda grasped the logic and became superannuation believers.
Whilst they are both conservative investors, they had been getting upset by the high fees charged by their superannuation fund managers, along with the financial immediacy of raising a family.
These fears, combined with doubts about rule changes later on in life and constant stock market corrections they hear about on the news (possibly making their superannuation funds worthless), meant they had been resisting putting anything above the mandatory requirements into superannuation.
To check their logic, they decided to sit down with their advisor and think this through coming up with a new plan.
As higher income earners, they decided to start embracing the 25% tax savings (return) and salary sacrifice more into super as a way of accumulating greater funds into their retirement. They realised that accelerated forced savings was a great way of providing greater choices later on in life.
They realised that the impact of paying high fees to fund managers for little returns was making an impact on their balances. So, they fully investigated the lower cost managed options before deciding to take control of their future retirement and rolled their funds into a low cost SMSF fund.
This had a major two way effect and their interest levels in their retirement rose greatly.
Making Informed Decisions
Aaron and Linda purchased an investment property using half of their superannuation funds and through SMSF borrowings they leveraged (conservatively) this asset at 50% inside their SMSF.
Then, to repay the borrowings faster, they increased their salary sacrifice into the SMSF picking up on the tax savings along the way, thus fast tracking the debt reduction.
With the other half of their SMSF funds and to achieve some balance they invested 30% into an Australian ASX Exchange Traded Fund to take advantage of the franking credits to increase their after tax returns and for further diversity the 20% balance went into an International Exchange Traded Fund.
Bottom Line: "U can't touch this" they decided is a good thing (and a great song); and they are now both on track for a future with significantly more choices.