I’m giving away a Porsche to AMP!
Have you worked at a large company before? If so, check your super statement. You might be giving away a Porsche to your super fund manager!
Like so many Gen-Y's, I've hardly paid attention to my super in the past. It has always felt too far away. But this year I decided to pay some attention to it.
When I started digging into my super - I FLIPPED OUT!
I found that I have been paying a lot of unnecessary superannuation fees. No surprises there. But things looked worst 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 I got here?
Like 80% of Australians, I have always stuck to the super fund provided by my employer. I never checked the policy they offered me. They said it is a corporate plan. They told me that I was getting a "special deal". Sounded pretty good, right?
Currently, I have two super funds - inherited from the two companies I've worked for. The first fund is an AMP fund I got when I worked for Macquarie Bank from 2007 to 2009.
In my AMP fund, I have two years worth of super contribution. I never added extra contributions. I have never looked at, or touched, that AMP Fund. Well ... until now.
What's happening within my fund?
This year, I finally looked at the AMP fund Year-End Statement. This is what I found:
- started year with $8,599
- "+" $145 from Contributions Tax
- "+" $1,120 in Net Investment Earnings
- "-" $1,055 in Fees
- Ended year with $8,809
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 2.4% return for the year. Wow! That is worst than the return on a term deposit I don't pay fees for.
On the other hand, my trusted super fund, made a total of $1,204 or 573% more than I made. Yep, that happened!
Emmm ... WTFees
The fees that stacked up were:
- Investment fee of $149 (approx 1.71% of my fund value)
- Member fee $89 (another 1.0% of my fund value)
- Insurance of $966
By themselves the Investment Fees are tremendously expensive. I could invest in a low cost ETF portfolio instead - more about that in later posts.
For now, I let's concentrate on the $966 of insurance.
What? I have insurance?
The thing that I'm 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 cover!
Unfortunately, it is quite common for packaged super funds to have insurance in them. I am not debating the merit of insurance as a general concept. Some people want and should have them.
But for me, this insurance doesn't make any sense. At the time of the super policy, I was 23 years old, single and had no dependents. Why am I paying for $2.4 million in coverage?
Insurance killing my fund returns?
When you crunch the numbers, you can see how bad this necessary insurance is to my super. Assume that I continue with this super fund until I retire at 65 (very unlikely). Paying AMP $966 per year from 23 to 65 years old would total $39,606 in insurance premiums.
Now, let's consider what would happen if I didn't have this awesome insurance. I would get an extra $966 in my super every year. My High Growth fund should return an average of 8%-9% p.a. or around 6% real return (adjusting for inflation).
My $966 of yearly contribution growing at 6% per year would result in an extra $181,132 by the time I'm 65 years old. Yep, a smacking $181,132 - in today's spending power.
Instead of my unnecessary insurance, I could afford to buy a brand new Porsche Cayman GTS 981 worth $180,118 when I reach 65 years old. Or you could get a Maserati Ghibli S or Mercedes SLK 55 AMG instead.
How to avoid being like me
I suspect that many people of my generation never paid enough attention to their super. It seems so far away. But ... do you want to keep your Porsche at retirement or prefer a Toyota Camry?
Start caring about your super isn't that hard. Here is a 3 step plan:
- check your most recent super statement for fees being charged (it should have just arrived via email or post);
- think through what level of insurance you need;
- check how much you are paying for management fee. Anything above 1.0% should be questioned.
I'm on a path to change my entire super setup. In upcoming posts, I'll step through how to take control of your super with low cost ETF portfolios. I'll be doing that with my super, and NOT using a SMSF. Sign-up to the blog to get updates on that.