This article originally appeared on BetterWealth.
Have you worked at a large company before, or had a lot of different jobs? If so, check your super statement. You could be giving away a Porsche to your super fund manager!
Like so many young people, I hardly paid attention to my super. Retirement always felt too far away.
But this year I decided to start digging into my super, and I FLIPPED OUT!
I found that I have been paying a lot of unnecessary superannuation fees (no surprises there). And things only got worse when I crunched the numbers.
I realised that if I kept things unchanged, I’d lose out on $181,132 by the time I retire; enough money to buy myself a Porsche Cayman GTS 981.
How did my super get so bad?
Like 80% of Australians, I have always stuck to the super fund provided by my employer and have never checked the policy they offered me.
They said it was a corporate plan and told me that I was getting a ‘special deal’. It sounded pretty good and I didn’t question it.
As a result, I have two super funds inherited from the two companies I’ve worked for. One of them is an AMP fund that I joined when I worked for Macquarie Bank from 2007 to 2009, and it’s that fund I want to look at today.
In the fund are two years’ worth of super contributions. I never made extra contributions. In fact I have never looked at, or touched, that AMP fund… until now.
What’s happening with my fund?
This year, I finally looked at my super statement from AMP. This is what I found:
- I started the year with $8,599
- “+” $145 from contribution taxes
- “+” $1,120 in net investment earnings
- “-” $1,055 in Fees
- I ended the year with $8,809
And hang on… there is an extra sneaky bit. They actually charged me an extra $149 in fees, hidden in “net investment earnings”. My portfolio actually increased in value by $1,269.
All in all, I made a total of $210, or a 2.4 per cent return for the year. Wow! That’s less than the return on a term deposit which I don’t pay fees for.
On the other hand, my trusted super fund made a total of $1,204 from my account; 573 per cent more than I made. Yep, that happened!
Ummm … WTFees?
It sounded crazy, so I dug a little deeper into how my fees stacked up:
- Investment fees of $149 (approx 1.71% of my fund value)
- A member fee of $89 (another 1.0% of my fund value)
- Insurance premiums of $966
By themselves the investment fees are tremendously expensive. I could invest in a low cost ETF portfolio instead for a fraction of the cost and achieve market returns.
But for now, let’s take a closer look at my insurance premiums.
What? I have insurance?
The thing that I was super p!ssed off about is the insurance coverage. I never knew I had insurance within my super. AND I was paying for $2,400,000 worth of life insurance cover!
It is actually quite common for super funds to provide insurances to their members by default, generally some combination of life, income protection and total and permanent disability.
Now I am not debating the merit of insurance as a general concept. Many people need it.
But for me, this insurance didn’t make any sense. At the time I was 23 years old, single and had no dependents. So why was I paying for $2.4 million in life insurance coverage when a significantly lower amount would have sufficed?
Turns out this insurance was killing my fund returns
When you crunch the numbers, you can see how bad this unnecessary insurance is to my super returns.
Assume that I continue with this fund until I retire at 65 (very unlikely but still). Paying AMP $966 per year from 23 to 65 years old would total $39,606 in insurance premiums (although these premiums would increase as I aged).
Now, let’s consider what would happen if I didn’t have this insurance. I would get an extra $966 in my super every year. My High Growth fund should return an average of 8 to 9 per cent per annum, or around a 6 per cent real return (adjusting for inflation).
I could afford to buy a brand new Porsche Cayman GTS 981 worth $180,118 when I reach 65 years old. Or I could get a Maserati Ghibli S or Mercedes SLK 55 AMG instead.
How to avoid being like me
This is just my situation. I’m using myself as an example because I suspect that many people of my generation have not paid enough attention to their super. Yes, retirement seems so far away. But would you rather a Porsche at retirement or a Toyota Camry?
Caring about your super isn’t that hard. Here is a three step plan:
- Check your most recent super statement for fees being charged (it should have arrived via email or post);
- Think through what level of insurance you need, including life, total and permanent disability and income protection, and make sure you have the right amount of cover;
- Check how much you are paying in investments and management fees. Anything above 1.0% should be questioned.
As a result of following this plan, I’m on a path to changing my entire super setup. And hopefully a nice ride into the sunset when I retire.