Significant birthdays can be powerful catalysts for both celebration and reflection. Although, it is perhaps fair to assume that the ratio of reflection to celebration is strongly correlated to how high – or low – the particular birthday is.
One of the great strengths of the Australian super system is its mandatory contribution regime, currently at 9.5 per cent of earnings.
For young people entering the workforce this has the positive effect of getting them started on the retirement savings journey much earlier than they otherwise may do voluntarily because numerous behavioral finance studies tell us that as human beings we are not good at deferring today’s needs for benefits that will not appear for a long way in the future.
The flipside of the mandatory contribution regime are the low levels of engagement among super fund members, something that the Financial System Inquiry chaired by David Murray has called out as an issue with the system.
For younger super fund members inertia can work both for and against you. It can work for you when you select a long-term asset allocation and then let it run until the next really significant birthday.
This we might call the Rip van Winkle option, as outlined in the behavioral finance book Nudge written by Richard Thaler and Cass Sunstein. In summary Rip is told he is about to enjoy a 20-year sleep – in line with family tradition – and needs to set his asset allocation accordingly.
For a 30 or 40 year old this is not an absurd notion – it is a real-world scenario when you consider the restrictions on accessing your super until 65 (or later).
For someone in their 30s there are really three simple questions they should be able to answer about their superannuation. These are:
- Where is my super?
Too many people in Australia have multiple accounts – there are more than 29 million accounts but only around 15 million fund members and as a result people are paying multiple fees. The good news is most funds offer consolidation services.
- How is my super invested?
This is probably the most important question and one requiring a little more work. The easy option is go with the default MySuper offering, but the challenge there is that the same asset allocation is offered to all members – whether you are 30 or 64. Most funds offer a 70-30 split between growth/income assets which is reasonable. The issue is one of risk. A younger person may be happy to take on more growth asset (i.e. sharemarket) risk where the older member nearing retirement may want to dial risk back as they approach retirement.
In the US 401(k) system one of the most popular innovations in recent years has been the development of "lifecycle" funds that will automatically shift your asset allocation to more conservative settings as more significant birthdays are chalked up.
Some funds in Australia are now beginning to offer these types of investment options.
- What fees am I paying?
As investors we cannot control a fund’s future performance. What we can control though is the level of fees paid. Small fee differences make a big difference over such long time periods so for younger members this is an area to pay attention to and compare your fund’s fees with other options.
Time is the luxury that young people have compared to those closer to retiring. So don’t waste your next significant birthday – use it as a motivational marker to check in on how your superannuation and/or your financial plan is tracking towards achieving your life stage goals.
Because you are only young once.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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