Tuesday, 8 October 2013
If you could make a Million dollars for comparatively very little effort, would you do it? Just think for a minute about what you would do with it. More holidays? Buy some nice luxury items, perhaps a yacht or a nicer home? Or just be able to eat out when you want to?
And it is not that much harder than the effort of buying a lottery ticket, considering a “win” will be nearly automatically Guaranteed. Surprisingly, more than 2/3’s of Australians don’t do it and aren’t interested.
I am of course talking about (yawn) Superannuation savings. Each person gets more than a whole months pre-tax pay automatically invested for them every year. That’s more than getting a 10% pay increase. Yet many people’s interest and effort stops when they file away the annual statement, probably because it seems too far into the future. So where does the Million Dollars come into play?
Well, the average Australian employee puts away their Superannuation payments into a default Superannuation account. These large fund managers typically charge about 2% of the balance of what you have in your account, irrespective of performance. In the majority of funds, all they do is buy an average portfolio of shares from the Australian share market. Very frequently, they buy the shares through another fund, which of course means you are paying a fee twice (they don’t tell you that though). So when your Super balance gets a return of say 6-8% before fees (which is roughly what most funds achieve on average over the longer term), the poor Superannuation Funds are making a quarter to a third of what you are, for doing next to nothing for you! With no risks to them. Hardly fair.
The Million dollars comes about because of Einstein’s greatest discovery: the compounding effect of interest. By you keeping the 2% extra per year that the fund charges you by changing to a fund with lower fees, over an average 40 year working life, your retirement funds increase from $1,782,000 to $2,750,000 (of which you only save a little over $600,000 (including inflation): time and interest do the rest!).
There is now increasing discussion about why Self Managed Superannuation Funds (SMSF) are growing so quickly. It shouldn’t require a Commission of Inquiry to work that one out. The $18.6 Billion dollar Superannuation Industry (yes, that is how much they collectively receive in fees last year, four times what households pay in bank fees) needs to start justifying where all this money disappears to. Not everyone can or will start a SMSF, however everyone can take an interest in their superannuation, and just changing to a fund with a lower management fee could land many people a retirement windfall. Yours truly is not a financial adviser and the above average example is just that, but I do suggest contacting a real adviser yourself so they can go through your circumstances. Check their credentials first. Even with a shorter investment time span or just halving your funds fees can have a massive effect.
The Not So Great Prophets
Whilst the domestic landscape still has many hurdles to cross, there has been a pronounced improvement in confidence in recent weeks: there is talk of the housing market booming, businesses are reporting increased inquiries and sales, terms of trade are showing an uptick as mining goes from construction to production etc. However, if you look at about the middle of the daily newspapers, there is a matter which could make the GFC look like a blip on the worlds’ economic development.
3 years ago, the American government was broke and President Obama negotiated a deal to pass his health care reforms and raise the debt ceiling (amount they allowed themselves to borrow). The Republicans agreed on the basis that over the next three years the Government found a way to live within its means and stopped spending more money on recurring expenditure (that is, welfare and other programs that they can’t afford). They “kicked the can down the road”, but since then, very little has been done to reduce unnecessary spending or increasing the taxes they collect. On the 1st of October, because the Budget was still a mess, the terms of the 2010 agreement came into automatic effect: about 800,000 “non-essential” Government employees were put onto unpaid leave, etc. This is estimated to cost the US economy $300 Million per day, still well be shor t of the chronic $60 Billion a month US Government Deficit. If that is not bad enough, on about the 17th of October, the US runs out of money altogether. Unless they again agree to increase the debt level, it is not known how the US will pay for services, debts etc.
The surprising part is that most media are barely reporting on this. It’s probably because nobody knows what this means for the worlds’ largest economy, let alone the rest of the world (then again, the Experts have been wrong on nearly every forecast and prediction since about 2006, so why the reluctance?). The consensus is that the stubborn politicians will still reach an agreement (otherwise they won’t get re-elected). However, what it has shown is that there comes a time when even Governments can’t continue to spend more than they collect. For us individuals, the banks take over our business or house and sell it to pay off the loans. Soon this will apply to Governmen ts too. In the case of the now broke city of Detroit, Judges are now deciding whether people’s pensions will be cut/reduced, and/or the high security debt holders (who technically do get paid first) will lose all or part of their money – if they do, they’ll stop lending Governments money, or at least charge a lot more in interest to compensate the risks.
The Economic Prophets have stopped preaching, and that should concern us enormously. Whatever “solution” they come up with in the US, investors and Governments are waking up to that the unsustainable welfare society spending spree’s are over. This will slow world growth, hopefully without a massive crash, but no doubt everyone is going to be left bruised and battered to some extent. Hopefully other countries and their citizens as well as companies will take heed of the warnings that there may not be anyone there to bail them out and address their problems for them. In the mean time, what doesn’t break us makes us stronger. Great profits/prophets face a challenging future!
As always, onwards and upwards!