Outside your family home or business, superannuaiton will most likely become your biggest asset. However because you cannot access it until retirement, many people discount the importance of managing it effectively.
Over time, we have discovered that many people believe things that just aren’t true when it comes to super and as a result they often make un informed decisions that have significant long term consequences. Some of the things we have heard include:
Super is a terrible investment : FACT, super is not an investment, it is simply a structure that allows you to make investments. The biggest benefit is that the returns inside your superannuaiton fund have a maximum tax rate of only 15%. This compares to a maximum tax rate in your personal name of 45%, plus medicare. So if you had a choice which tax rate would you prefer?
It is the investments that the determines how it performs. You can invest you super in cash, shares, property, alternative assets and more or a portfolio that has a mixture of different assets (this is the most common for most peoples super). What is important to understand is that you can control where the money is invested and you can do this by contacting your fund and making an investment choice. Sadly most people never do and they get the ‘default‘ option which may or may not help them to reach their goals. If you chose to invest your money it cash you will get the return that cash provides, if you elect to invest your super into Australian shares and the stock market goes up by 10% your will get a similar return. You will also get a similar return if the market was to give negative 10%.
Its locked away for ages so why should I care about it : FACT, in normal circumstances super cannot be accessed until retirement, which could be many years away. However the rule of 72, which is the rule of compounding exist. In fact Alfred Einstein created this formula for compounding interest, known as the rule of 72 and went on to describe it as the 8th wonder of the world.
So if you were to leave your money in a lower returning investment, lets say 6% then following the rule of 72, if will take 12yrs to double. As you can see, even small differences in return can have a significant difference on your investment outcome over a long period of time.
- $100,000 invested where the avg return is 6%, over 36 years would double three times and grow to $800,000
- $100,000 invested where the avg return is 8% over 36 years would double four times and grow to $1,600,000.
Just one more compounding period is significant because it makes a massive $800,000 difference.
It is a simple example but it highlights that because it is such a long term investment, managing it today could make a significant difference to your retirement dreams.
There are many other mis conceptions about super and it important not to let opportunities slip through your fingers due to not having all the correct information . For more information about how to maximise your superannuation, contact us today!