It is important to get this right, because for a 40-year-old a 2% lower annual return will reduce the amount you have in super at retirement by more than 20%.
Diversify your investments
While it is important to have a high percentage of growth assets if you want higher returns, it is just as important that you diversify into different asset types, industries, countries, currencies, and stages of growth.
With shares, there are two ways to invest. Passive and active investment. Passive investing is where the fund manager doesn’t try to pick which company will do better than the others, and active investing is where they do. History shows that after fees and taxes, 75% of actively managed investments do not beat their passive investments counterparts.
The average fees paid through super are around 1%. The fees are made up of a combination of administration fees and investment fees. Don’t confuse the contributions tax or insurance premiums for super fees.
Administration fees range from a flat fee of around $100 per year up to 0.4% of the amount that you have invested.
Investment fees range from 0% through to around 3%, with passive investments having the lowest fees. While we are here, be careful if the investment fee is 0%. There is a catch. Would any fund manager really do their job for nothing?
There are two types of contributions.
Concessional contributions are paid from your pre-tax income. You can put in up to $27,500 each year, although this includes your employers’ contributions. The great thing about these, is it is possible to put in more if you didn’t make the maximum contribution in previous years. Check your MyGov account to see if you can make additional concessional contributions.
Non-concessional contributions are when you put money into super after you have paid tax on it. The real benefit of this is when you retire you don’t have to pay any income or capital gains tax. None!!
To get your super sorted, do the following:
- Check the investment options your super is in. In most cases you will be in the default investment options that could have up to 30% conservative assets. If you are willing to take more risk, move to investment options that have more growth assets
- Make sure your investments are spread across a wide range of different asset types. Think Australian and international shares, emerging markets, and property
- Where possible, select passive investments – this is where you may need to look at a different super fund. If you are moving, make sure you consider your insurance
- Make sure your total fees are around 0.5%
- Contribute as much as you can
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