Super Tips To Get Your Finances In Order
Do you throw your superannuation statements straight into the rubbish? Are you unsure how the whole thing even works? You’re not alone. But a little knowledge goes a long way. Athanae Lucev chats to Financial Planner Steven Iremonger to demystify all things superannuation.
In our first piece on superannuation, we covered a fair bit of ground. Here’s a recap:
- One in three women have no superannuation on retirement
- Women retire with an average $150,000 less in the bank than men
- Only 15 per cent of women know their superannuation balance
- Fewer than one in 10 women know the sum they would need to retire on
- One in 10 women understands their superannuation statement
Often, it is only after a divorce or relationship breakdown that women take a serious look at their finances, our super expert, Financial Planner Steven Iremonger said.
“For the women I have personally known who have experienced a difficult separation, they will tend to go through a period of shock and lose self-confidence. Sometimes this may mean they are not active enough to ensure they receive their equitable share of the joint assets,” he said.
Yes, it’s all pretty dry stuff. But it is so important for women, at any age and stage, to get our heads out of the sand, open the letters and emails from our funds, consolidate, and get armed when it comes to planning our financial futures.
But it is so important for women, at any age and stage, to get our heads out of the sand… and get armed when it comes to planning our financial futures.
We asked Iremonger to spell out some Super basics in a way that is super simple. Please note this is not direct financial advice and you should seek your own advice on any investments or plans you’re considering.
Um, what actually is superannuation? We think we know but just to be sure…
Our expert says you should think of Super as a tax structure. If you’re working, it’s compulsory for your employer to make contributions of at least 9.5 per cent of your wages. Sometimes when you start a job you will notice your salary package is inclusive of that figure.
“This counts towards your concessional contribution limit of $25,000 per year. Concessional contributions include employer contributions, salary sacrifice from your pay, and lump sum payments for which you will claim a tax deduction,” Iremonger says. “These contributions are taxed at 15 per cent. So if your marginal tax rate is 34.5, 39 or 47 per cent, then you are receiving more in super compared to what you would receive in your hand after tax.”
“If your tax rate is 39 per cent then from $100 before tax you receive $85 in your super compared to $61 in your hand – a 39 per cent increase which can then be invested and benefit from compound returns over time. For lower income earners, the Government recently made changes so that they will automatically receive a ‘Low Income Superannuation Tax Offset’ up to $500 to offset the 15 per cent contributions tax.”
Super funds themselves are basically a great low-tax environment to build up your retirement savings.
What happens to my superannuation if I’m self-employed?
You need to make your super contributions and plan carefully for your retirement – otherwise you’ll end up with no super to fall back on.
Got the appetite to shift to more ethical superannuation funds?
Iremonger says this movement is “gradual” and he hasn’t experienced it significantly, partly because it requires a thoughtful and strategic investment strategy.
“Almost nobody I meet actually understands their investment strategy, so you need to actively want to understand how you are invested and what the ethical alternatives may be,” he said. He added that academic research suggests ethical investment does not generate excess returns, citing Tesla as an example.
“I believe (Tesla) would be classified by many as an ethical investment. But is it a prudent investment? Aside from shareholder governance and transparency issues, a growing demand for electric batteries has led to a growing demand for lithium production,” Iremonger explains. “Lithium is a very hazardous mineral. Is it unethical to invest in a lithium miner that supplies Telsa? Is it prudent to invest in Tesla when it is very highly priced, holds a significant debt burden and is increasingly facing stiff competition from the existing highly efficient and competitive car makers?”
His personal opinoin? You will create more of an impact by voting with your feet as a consumer. Or if you invest capital into a new, ethically focussed, company if you’re looking for a solid investment approach.
“Purchasing shares of established companies do not provide additional capital – it is a zero-sum transaction where you are just buying the existing share from someone else,” he said. “The nature of that share does not change.”
And his superannuation advice to someone just entering the workforce?
One: Don’t fall into a nightmarish situation where you end up with ten different superannuation accounts.
Two: Get income protection cover.
And while we’re on the topic of money, Iremonger says it’s wise to keep debt under control. Eliminate personal loans, credit cards and other short-term debt.
Eliminate personal loans, credit cards and other short-term debt.
“The largest impact on the future trajectory of the super balance when you are young is your ability to work. If your ability to work is disrupted, that is the largest risk to the future balance,” he said. “The default (income protection) schemes provided by super funds do not classify as very good. I recommend people seek out advice about how they can obtain the right cover through a financial adviser. It is also best to get the right cover when you are young and healthy so you are not excluded when you are older.”
“Making sure you have a financial buffer to cover unexpected changes in your life, or opportunities to change your work/lifestyle balance, is also a very high priority,” he said. “I’d tend to suggest (having enough savings) to be able to cover all your living costs for three to six months is ideal – something that most people are unable to do. Once you have your short and medium-term priorities in order, you can then increasingly focus on your long-term priorities including contributing more to super.”
And here’s a tip – most fees are not explicitly stated in your statements but are actually charged internally before you receive your investment returns,” Iremonger said. Which leads us to…
Read the statement. And if you don’t understand it, ask someone who does to explain it to you. If that means looking outside friends and family, get the help. It’s the kind of life skill that should be on the curriculum at school but isn’t.
There is some good news about superannuation…
Once your super balance is sitting at $100,000 or more it is possible your investment returns might become larger than your employer contributions, Iremonger said. It’s at this point that your investment strategy becomes crucial.
“In my experience, most people who are aged 50 are going to view their super as being about twice as important as those aged 40,” he said. “The younger you are, the more important it is to focus on self-improvement and building your future earnings potential. Over time, as your assets and super balance increase, it is important to ensure you know what you have and how it works.”
“Know what types of contributions you can make if you have the cash flow available in your budget – either a lump sum amount for the Government Co-Contribution, making the primary income earner make super contributions to the low-income spouse to receive a tax offset and finally making concessional contributions to super when your income tax rate is higher.”
As with anything – information is key. That’s it for now but stay tuned for more in our financial literacy series.
Is your superannuation all over the place? Are you starting to worry about your nest egg? Ask us any questions you have about superannuation in the comments below.