Alternatives to super when the economy isn't doing so great?
July 28, 2008 9:23 AM   Subscribe

What should I do in addition to super to have any hope of retiring several decades from now?

So according to the Sydney Morning Herald superannuation returns in Australia are way down . I've long been sceptical of being forced to put so much into super since it is more volatile than we've been led to believe. I'm wondering what alternatives there are.

I'm 30, work in the government, I have two different government super schemes. I'm currently contributing 8.5% of my pretax income along with my employer's 17%. I am in a defined benefit fund which I think will screw me in the long run. I have no assets but am saving for an apartment downpayment.

I would like to live overseas for a year on and off here and there, and maybe have kids and this is going to put all kinds of breaks into my contributions. And I'm also wondering, what else shoud I be saving up for to contribute to especially with the economy the way it is. What are the alternatives to super? Should I be watching for the market to bottom out and buying index funds? Buy into property? Put cash into online savings accounts?

I do want to retire someday, and I'm really not sure that super is going to cut it.
posted by wingless_angel to Work & Money (4 answers total) 1 user marked this as a favorite
Best answer: The arrangement of a DB fund is such that investment risk is carried by your employer... which is why they're becoming so rare. It's called DB because the benefit is pre-defined, and the actual conts your employer makes varies with the investment return received.

The amount you contribute on top of that is normally treated as an accumulation fund - it should be separate on your statement as the 'accumulation portion' or something like that. This will be affected by market returns.

As to alternatives, even if the market is doing piss-poor, you may still find that the huge tax advantages of super may make it competitive over the longer term. Also, there's not necessarily any conflict between using super and waiting 'for the market to bottom out and buying index funds' (or, in many cases, individual ASX stocks if you want - depends on your fund and scheme). You can most likely do just that within the framework of super, to get all the tax benefits of salary sacrificing (or do post-tax conts and receive the govt co-contribution, if that's applicable).

This is general factual info and is NOT financial advice.
posted by pompomtom at 5:36 PM on July 28, 2008

Sorry... shorter version: Super is a tax structure, not an investment class.

Depending on the class of investment you choose, you may be able to hold it within your super account (eg interest-bearing cash accounts or index funds, to pick two you've mentioned). The headline-getting low returns are certainly a worry, but they are the result of the fact that 95% of people with super accounts don't do anything about them, and get dropped into whatever default investment is used (normally this is based on age, with younger people getting higher risk/reward classes), which is likely pretty heavy on Australian and international shares.

(Still factual info and NOT financial advice).
posted by pompomtom at 5:48 PM on July 28, 2008

Response by poster: Thanks for the info pompomtom, time to do some research I think. I'm definitely in the 95% who has done nothing, mostly because I lack the education to know what the options really are.
posted by wingless_angel at 4:33 AM on July 29, 2008

As Pompomtom said, superannuation is a tax system, not an investment.

In Australia you can buy investments in your own name, and then you'll pay marginal tax rates from 0-46.5% on them. Or you can set up a company and buy assets in there, and you'll pay 30% tax, until you pay your profits out as a dividend and then you'll pay personal tax rates minus a 30% "franking credit" for the tax already paid.

In addition to the personal and corporate tax systems, you can also invest via the superannuation tax system, where you'll pay 15% on assessable earnings, until you commence a pension when it all becomes tax free if over age 60 at the time of withdrawal.

If you are under 60 you pay personal marginal tax rates on your pension payments but get a 15% tax refund, which for most pensioners is enough to make their tax rate zero anyway if they don't have a lot of extra income.

The superannuation tax system is obviously more attractive than the personal or corporate tax systems because the tax rates are lower. It is thus a nonsense to say that superannuation is inferior to personal investing.

But after blaming superannuation, the questioner then went on to complain about investment returns. Superannuation is just a tax system, obviously the real culprit here is that the questioner doesn't like experiencing negative investment returns.

We've just had a glorious five year run with investment markets consistently delivering double digit returns. It is not reasonable to expect that investments can do that every year though, a negative return every now and then is to be expected.

If the questionner doesn't accept the possibility of negative returns then clearly a more conservative investment approach is warranted. It would be worth digging out the annual statements which the questioner has presumably thrown in a shoebox immediately apon receipt and find out what the fund's more conservative investment options are.

Cash and bonds, or "conservative" portfolios which mix up a lot of asset classes but invest the bulk of the money in cash and bonds have much lower levels of volatility than shares and property, but at the same time they have lower long term returns. You wouldn't have gotten a double digit return in the last five years from investing in a portfolio with only cash and bonds in it.

Risk isn't necessarily something to be avoided in markets. If you take the right kinds of risk (i.e. allocate money to diversified portfolios of growth assets) you get a higher return in the long term. That is just the way a well functioning market operates. Investors have a tradeoff between security and returns. This tradeoff is unavoidable. Claims made by various promoters that they can achieve high returns with low risk should be treated with the utmost suspicion, and dismissed out of hand by inexperienced investors that lack the ability to understand complicated investment strategies.
posted by Mokusatsu at 5:57 AM on August 15, 2008

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