Episode 8 | Why Superannuation Is A Bad Investment
In this episode of the Enriched Wealth Podcast, host Kris Tatt breaks down why superannuation isn’t really an investment, but rather a retirement savings structure that holds various investments.
Kris challenges common misconceptions about superannuation, explains its tax benefits, and discusses how to optimise this powerful savings vehicle for your financial future.
Key topics include:
The history and purpose of superannuation as a retirement savings system
How the media often portrays super in a negative light
Understanding the difference between super as a structure and the investments within it
Why knowing where your super is invested is crucial
Tips for maximising superannuation benefits and navigating the complexities of retirement planning
If you’ve ever felt uncertain about your superannuation or wondered how to make the most of it, this episode will empower you with the knowledge you need. Tune in to learn how to leverage superannuation’s tax advantages and investment options to secure your retirement.
Listen now and start making informed decisions about your financial future!
Transcript
Kris Tatt
Welcome to the Enriched Wealth podcast.
Today you've just got me.
No, no interviewees, so apologies.
But today I want to talk about a bit of a passion of mine, which is that superannuation is a bad investment.
And you might be wondering, well, Chris, you work in superannuation.
You have self self-managed superannuation for however many years.
I thought you'd love superannuation.
Why is it a bad investment?
And look, I want to be clear that superannuation is not bad, but we can't think of it as an investment.
So today I want to unpack a few of the concepts around superannuation, probably some of the misconceptions, some of the frustrations I have as well too, with what's out there in the industry.
And hopefully you'll walk away from this.
I'm feeling a bit more empowered and have a bit more knowledge around superannuation.
So to start off with, why do I think superannuation is bad investment?
And I think it's because the media, and I'm not, not here to brag on the media, but media love headlines and they love bad headlines.
And so a lot of times when we see there's been a market downturn or something's happened, billions of dollars wiped off retirement savings and things like that, people or, or supers lost X amount today or, or things like that.
People associate super with the market, all their retirement savings with the market.
And while it can be true that association, we have seen time and time again make superannuation seem like a negative thing.
Superannuation in and of itself is not negative.
And I want to unpack a little bit more about that.
But the reason I think we've got here is that fear headline sell that big red loss of dollars on the front page is what they're trying to sell.
But in doing so, they're actually doing a disservice to that industry.
And I think that that is where we need to get back to some grassroots around what superannuation is, what the intention of it was and why it's not a great investment, but why it's actually not even an investment at all.
So let's go back and do a little bit of history on superannuation because I think that's always a good place to that is where it's come from and why it's here now.
And so if you go back into the late 80s and early 90s is when superannuation started becoming mandatory and it was set up as a retirement saving system.
So back in the day, there was some really long-term planning, which may seem a little rare in politics these days, but there was a really long-term planning around the baby boomers who are now actually at retirement.
And they were looking at the baby boomers and saying there's going to be this big wave of, of people that retire in 20 years, 30 years time that are going to need a pension, going to need retirement money.
Usually, what happens is that more people enter the workforce than leave the workforce.
So what happens is more people enter who pay tax and so they can fund the people who are leaving the workforce.
But that was going to change with the baby booms.
And So what they decided to do is bring in a retirement saving structure where employers would have to make part of part of the wage or part of what people earn go into a retirement savings vehicle, which is superannuation.
And so when we talk about superannuation, it is a retirement savings vehicle.
And so that we're actually, Australia's actually at the forefront.
We are world leaders in our retirement saving system.
We were, we brought it in mandatory long before other other countries as well too.
So just another thing Australia excels at, but in doing so, we can lose sight of some of that when we see bad headlines and different things like that.
So the reason why it's a great retirement savings vehicle is the tax, the tax concession that superannuation gets.
So super unlike other structures gets great tax, tax benefits and tax concession.
So 15% is the standard tax rate that you pay on your suit on earnings and super also on those employer contributions going in.
And then as you get into retirement phase, you can even be paying 0% tax on the earnings and on the money you draw out as well.
So it is a rate system.
I always say that in Australia we don't have to go to the Cayman Islands or to have the Swiss bank account or things like that to dodge tax.
We actually have a system that allows us to payless tax or no tax at all as part of our retirement savings.
And it's to encourage people to be able to take control of their own retirement and their own savings.
So why is super a bad investment?
Because soup is actually a structure and that's what people forget.
And I think being working a lot in self-managed super funds, I get to work a lot with those structures and, and work on them one on one with clients as well.
So unlike a a big retail super fund that you might see advertised elsewhere, self managed is you have that yourself, that structure and you manage that yourself.
And so that's where I've got to really see more of the structure side.
So the structure for self-managed for super in general, sorry, is where you is basically all the rules around how you can contribute, how you can withdraw and the tax rates you pay.
So that's where super as a structure really makes sense because if you can get a lower tax rate, you can basically exponential your returns over time because if you're paying less tax along the way, that puts more money back in your pocket or in the Super pocket to then go back into investments and things like that.
The reason super may not be a good investment is when you don't actually understand where the money that you're contributing is invested in.
So, let's give an example.
If you're someone with a super balance of $100,000 and I asked you today, do you know where it's invested?
If you, if I, if someone came up to you and said where's your super invested, would you be able to say I know exactly where it is?
A lot of people I talk to don't know.
And because they don't know that is when they get shocks when the market goes down or when things happen or they see it as a bad investment or they hear all those bad headlines is when they don't understand where it's invested.
So for a lot of people, you will have shares that you're invested in.
For other people, you will have cash or bonds that you're invested in.
But if you don't know where your super is invested, then all of a sudden you've lost control and you don't actually understand where your life savings are at at the moment and what impacts different things in the economy might have on it.
So if we have a spike in interest rates, that's great, but you've got to have investments in interest rate, interest-bearing products that actually move, move in the right direction.
When those interest rates spike, if you aren't invested in shares and the share market goes up, then you won't see those returns within your retirement savings as well.
So it's understanding where you've got your money invested.
So that's why if we're thinking about super and investing and where it needs to be, first we need to understand that it is a structure and we have control over that structure.
You can choose where your money's invested, but it is a structure.
So to unpack that a bit, we super as a structure allows you to accumulate wealth.
So you can put contributions in.
So your employer can put contributions in, but there's a range of other contributions you can also put into super to help build that retirement savings.
And those contributions can include small business CGT concessions.
So if you run a small business, you might get tax concessions when you sell assets, When you sell the business that you can contribute to super, you can make after tax contributions as well.
So you can just take money from your bank account and put it into your super fund.
It's different for everyone.
I'm not telling you to go and do that tomorrow.
You don't look and say I've got a lazy $10,000, I'll go put into super.
We're going to talk about a bit about time frames as well, which might impact when and how you use super.
You can also make downsize a contribution.
So if you're over 55 and you've sold your house that you live in, you can make a contribution because you are downsizing.
You don't even have to actually downsize.
You can buy the same size house or actually buy a bigger house.
But if you've sold a house after 55, that's another opportunity to think about putting that you could put money into super.
Again, you've got to meet the rules, but it's understanding the rules and how you can leverage them.
So super as a structure makes sense, but it also makes sense the closer you get to retirement.
If I was talking to a 30 year old, it wouldn't make sense to maximise super if they had a mortgage to pay down or they needed some money for a rainy day.
If it was someone who is getting near retirement and wants to build that wealth nest egg, then that might make more sense because they're actually able to access it.
They don't need it to pay for other things.
So again, it's understanding that it's a structure that you can use, but it's, it's also understanding when you can get that money back out.
So we don't want to limit the amount of cash flow if you're young, but also on the other side, we don't want to lose the opportunities to maximise it as you get closer to retirement and as you get closer to being able to access it and things like that.
So again, thinking and understanding and using the structure super, using the tax benefits that super provide as part of building your retirement savings is a great idea.
And I think having a great plan around retirement, a great plan around how you can utilise this vehicle force retirement savings is great.
If you just think of it as super as an investment, though, you'll, you'll, you'll always miss out on the opportunities to be able to build that, but also to you won't under, you won't fully understand what happens when something happens in the markets, how that impacts you.
So the first step is that structure you can get money in.
You can also get money out.
So once you hit 60, if you hit 60, that's a beautiful time for super.
And 65 is even better.
But after 60, you can actually start accessing super and there's rules around that, but you can actually start drawing money out if you need to.
So that for some clients that we see that might be paying down that last bit of debt that they have on the House, it may be a way to give them the opportunity to increase the the amount of deductible contributions they make.
It also might provide them the opportunity to transition to retirement.
So it's actually I start working three days a week and drawing down on my super as well.
So what happens is you hit 60 and super becomes this flexible structure, this flexible vehicle that you can start to utilise to help make your retirement more flexible.
Once you hit 65, everything that you have in super becomes unrestricted.
You're able to access all of it.
There's less rules that you need to think about as well too.
So that's just some of the things around the structure of super.
So if we think about super, we want to think about that structure and you knowing the rules around it so we can utilise it the best we can to maximise our opportunity for a great retirement.
The other side is the investments.
So super as a structure, as a retirement saving structure makes sense.
Super for investing also makes sense as long as we understand what we're invested in.
And I think so often is what I see is people don't understand what they're investing in.
And when they don't understand, that's when things go wrong, that's when they lose money and they get frustrated.
And that's when that's when you become disenfranchised with it.
But I want you to separate those two things out and say, this is a structure and this is investment.
So if we start talking about investments in super, again, there's lots of different things we can invest in, but it depends on who you're with.
So some retail funds give you the opportunity and the flexibility to change how you're invested.
So as a basic rule, if you're in an industry-type fund, you should have choices around high growth, growth growth balanced, conservative or ultra conservative as well or cash.
And So what that does is put you in within an investment profile and that investment profile will then have rules around how they invest that money.
So if you've got $100,000 in a high-growth investment, that might be 90 or 95% in shares and and five 5% in other assets.
And so in that scenario, let's, let's use the $1000 in super, $95,000 of it might be sitting on the share market.
And so what we say then is that you've got a large exposure to shares because a lot of what you have invested is in shares.
And so a lot of what happens in the share market will then impact your balance over time.
A different risk profile might have more, less, less exposure shares or less exposure to what we call growth assets and more exposure to other assets such as bonds or fixed interest and things like that.
So again, it's actually digging into the detail a little bit further than understanding or what am I invested in?
Does that make sense?
What are the costs around that investment as well?
So often we talk to clients who, who aren't aware of the costs that it, it actually that's associated with that super fund, with those investments, and it can look markedly different depending on what you're invested in and, and who and who you're using as your super provider.
So again, the structure makes sense, but who you're, who you've got that structure through determines what you can invest in and how you can invest.
And so if you look at self-managed super funds, which I've dealt with for many years now, that opens up the opportunity to invest in a whole range of things that you can't even get in a retail fund.
So you can get property, you can get exposure to gold or cryptocurrency or all different things within some self-managed super that you can't get.
You can get all those other things as well, but being self-managed gives you the most flexibility and the most opportunity to invest in what you want within super.
There are extra rules, extra requirements to run a self-managed super fund.
So again, it's that trade off of simplicity and a lot of people either don't know or just want it really simple and hands off.
And so they will put it over into something where someone manages everything for them and their hands off.
Again, still understand where it's invested, still understand how that looks.
There was a large retail fund that just recently announced that they had an off the books investment.
So not every investment is a listed share or a listed international share or a property fund or things like that.
Sometimes they'll have off the book investment.
So they might own a actual building.
So Superfunds own building, Superfunds invested in tollways or infrastructure projects, they might be invested in unlisted companies as well.
And so this retail fund was invested in a company and it had to write it off the books.
It had now become worthless and so they that to write off $1.1 billion on that investment within their super fund.
They're large, they can probably take the hit a little bit.
But again, if you don't understand where and, and have transparency around the reporting of where you're invested, you don't know what exposure you have to those things.
And so again, I say understand the investments just as much as the structure, understand the rules and how to utilise them, but then also understand where those investments lie.
And if you don't understand where you're invested, that's when there can be a lot of hurt or heartache.
And knowledge is power.
And so knowledge gives you the ability to make changes if you need to, to try new things to, to, to invest in the things you want to or come and get advice on, on where you should be best invested.
So again, thinking of the investments that you have, well, that's very different to the structure.
The structure gives us the ability to supercharge what we do lower tax environment.
We can supercharge our returns, supercharge the tax that we're paying, and do things like that.
It's the ability to really, really optimise everything.
But on the other side, if you don't have the investments right or you don't know where it's invested, then the structure may actually be negatively impacting you.
So again, we want to separate these concepts of structure and investments, and getting to better understand where you're invested gives you the power to make choices and not be scared off by headlines.
But it also means that you can disconnect these two elements because you should really be looking at your whole investment portfolio, not just what you have in super, but how is that a part of your bigger portfolio, You're part of your bigger plan for retirement.
You don't want every, all your eggs in one basket, but also too you want to know how those eggs are doing in those baskets.
And if you understand that thing, do that thing and do it well, but just understand where it is.
And so I guess that's the big take-home message for me.
It was only a short 1 today, but I've seen and I've talked to clients and I've heard, I've heard the scenario time and time again.
I don't like super and a lot of times I don't like super not because of the structure.
When you explain all the tax benefits of super and how you can really utilise it and and optimise your situation with that as part of building into retirement savings.
It is a great structure.
But from an investment side, if you don't understand the investments, you don't understand the fee structure around those investments and how that all looks, you don't understand if you can go and invest in direct shares or how you can do what you do.
That's where you've lost all that power.
You've lost all that ability to be able to make those empowered decisions for your retirement savings.
So my homework for you is to take out your latest super statement and read it and start to understand it better.
Start to look at the fees that are involved.
Start to look at where you're invested, how those investments have gone.
And don't just look at the end number, Have a look at what what's, what's the exposure?
What am I exposed to?
Is that where I wanted to be?
Did I realise I had so much invested in that asset class or or I didn't realise I didn't have a whole lot invested there?
Again, this is where you need to start to gather that knowledge.
We're here for support.
This is what we do day in and day as we help clients understand, do the analysis, help them run and understand everything.
It can be complicated.
Some might say that's by design.
It is complicated though, so it is digging into the detail.
But the more you know, the more you understand, the more you can utilise this great vehicle to get to where you need to be for retirement, the better.
But just understand that superannuation is not an investment.
Superannuation is a structure with investments in it.
And so when we treat those two separate, we can really start to utilise the power of it without the downside of not knowing what's going on within it.
So go, go from here, even press pause if you need to go and grab your super statement and start reading through it and start understanding what's going on within it.
It may surprise you, you may already know and if you do, that's great.
I would say that's where you need to be and you can rest at night and know what's going on and where it is.
But if you don't know, take the time or talk to someone that does and get some more knowledge, get the advice you need so that you are on the right track for retirement and you're not left wondering where everything's at or or why why this isn't going the way you wanted it to go.
Enjoy your day.
Thank you.
