Carmel Fisher - Learning from Aussie mistakes. A “super†idea. (5)

I have written several columns along the lines of ‘what can we learn from Australia?’ and I make no apology because, when it comes to financial services, there is a lot to learn.  Australians have had a two decade head-start on us, so they will have learned lessons that we don’t necessarily want to repeat.

Two pointers that emerged out of Australia for me this week related to superannuation savings.   

First off, the Australian regulator ASIC proposed a new set of disclosure requirements for anyone setting up a SMSF, a self-managed super fund where individuals can become trustees of their own retirement accounts, rather than delegating the management to a professional fund manager.  

The number of SMSFs in Australia has snowballed in recent years to more than 500,000 with a total of 963,000 trustees.  In the last financial year alone a new SMSF was established every 15 minutes and 40 seconds!

ASIC is concerned about the ill-preparedness of SMSF trustees and would prefer that only sophisticated investors manage their own retirement savings.  They commissioned a study which suggested that people shouldn’t even consider an SMSF unless they had $200,000-$500,000 in their fund.

As SMSFs have mushroomed so has the industry of professionals – mainly accountants and financial advisers – who provide advice to trustees.  For the most part these professionals do a good job, however ASIC has found that some have provided advice focused rather more on the professional’s ongoing income stream than on the interests of the client.  

ASIC is also worried that many trustees are not aware of what is involved with running a SMSF such as the time and accounting and legal knowledge required, the need for written investment strategies, the costs associated with setting up a fund, the complexity of closing one, the complications if there is a relationship breakdown, knowing what investments can and cannot be invested in, and understanding there is no access to a complaints tribunal if anything goes wrong.

So, a possible lesson for us?  DIY’ers beware – controlling your own destiny sounds great, but it may not be as straightforward or risk-free as you might think.   

The other pointer came from a Deloitte report on the future of superannuation which projected a rise in the total Aussie super pool to $A7.6 trillion by 2033 from $A1.6 trillion now.  The report said that despite the significant contributions that Australians have made into their superannuation since it became compulsory in 1992, many are going to be disappointed with their retirement standard of living.

It gave an example of a 30-year-old worker on an average annual salary of $60,000, who would have amassed approximately $1.1 million in superannuation by age 65 in 2048.  Unfortunately, that would only sustain a comfortable retirement until age 77.  For a comfortable retirement, workers should be making additional contributions of between 5% and 7% of their annual pay.

The lesson for us here?  We’re kidding ourselves if we think 3% or 4% contributions are going to cut it.  

If we really want to live comfortably in retirement, we need to start saving early and we need to save in earnest.