Saturday, April 20, 2013

Are 'Working Age People' Saving Enough?

Whilst reading the Sydney Morning Herald, there was an article saying that, "One of the nation's biggest superannuation funds has urged the government to encourage people to make more voluntary super contributions, saying most working-age people will have inadequate savings to fund a comfortable retirement."

The problem with those type of statements and claims is that the Australian super funds aka retirement funds, have no idea how much assets and investments that the 'working-age people' hold outside of super. So their comments aren't exactly applicable for certain subsets of the population.

Why would 'working-age people' voluntarily contribute more into their super funds when there are inherent risks in contributing more?

Risks such as legislative risk with successive governments constantly fidgeting with the tax rates and tax structures within the super fund environment. Increasing the access age also is a deterrent. Instead of being able to access at 55 years old, later generations are able to access at 68 years old. Lastly, the super fund's performances has been erratic at best. They charge fees to maintain and 'invest' our super money but I've yet to see my own fund outperform the index and justify the 'management' and 'investment' fees that they charge.

Not everyone is driven by the tax incentives and think that contributing the maximum into super is a great strategy simply because the tax on super is 15% on contribution and 15% on earnings. Even marginal tax rates of up to 45% outside of super isn't going to encourage people to maximise their voluntary super contributions.

So on the surface, if the super funds were to look at my balance or my friends' balances for example, then they're likely to see minimal voluntary contributions and think, "this generation has inadequate savings!". But they lack the ability to see that many friends and relatives prefer to invest directly into property and the stock market. It's not all about the tax savings! It's also about accessibility and flexibility to our savings, the ability to use our money however we desire and whenever we desire.

Once any money is voluntarily contributed into super funds, access is restricted. Early access is pretty much nil unless you are under extreme financial hardship and are about to be homeless, then you may be 'lucky' to be able to access $10,000 of your own money that's been locked up in super. The only other way you can have early access is if you've got a terminal illness. Those aren't attractive incentives to encourage my generation to contribute more into super.

Limited access and flexibility is a huge disincentive for the 'working-age people'. If those 'working-age people' are anything like my friends and I, then they'd prefer their funds outside of super so that it can be used to buy a house to live in, fund any family plans such as having children, pay for weddings, travelling and all the other financial demands of living life.

It's feasible for folks over 50 years old to contribute more to super but for Generation X, Y and Generation iGadgets, the restrictions are a HUGE disincentive.

So will my generation have a comfortable retirement just because we don't contribute large amounts voluntarily to our super funds?

Just by looking at my peers and friends' peers, I can resoundingly say yes. The majority that I know of, have invested outside of their super fund. They're saving and they're investing, but they're simply doing it outside of the super fund environment because the freedom and flexibility of using their funds however they wish outweigh the allure of the super funds' 15% tax environment that comes with plenty of strings attached.

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