This one super fund fix could save you thousands!

Here's a quick tip for your super fund that has the potential to save you thousands of dollars in fees over your working life!

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When it comes to super funds, most Australians would agree that there are a million more interesting things to occupy one's mind and time with.

Nonetheless, our superannuation represents our retirement and can determine how we spend our golden years. Thus, I think it's something all of us should at least be on top of.

Now, most Aussies without a self-managed super fund (SMSF) have their super in either a retail or industry fund. Typically, these funds will put your hard-earned 9.5% in what's known as a 'balanced' fund. Has a nice ring, doesn't it?

But a 'balanced' fund is not quite as cosy as it sounds. It's typically the super company's default choice, and is named for the 'balanced' manner it invests your money. This is normally across many different asset classes like private equity, government bonds, cash, property and (of course) shares.

Now, this strategy is okay. Not brilliant, but okay for most people. For investors, particularly ones with long-time horizons, it's normally not the best choice.

The benefits of indexing through your super fund 

Firstly, this is because investors with decades left until retirement will likely benefit from an aggressive portfolio allocation, rather than the plain-Jane, vanilla balanced super fund. Your fund doesn't really need defensive asset protection through bonds and cash if you're in your 20s or 30s. Instead, you should be primarily invested in growth assets like ASX shares, international shares or maybe property.

These investments are more volatile, sure – but they're also more likely to generate the best returns. And getting the best return you can, for as long as you can, translates into more money for your retirement.

Secondly, a balanced fund is normally expensive. Not usurious, but expensive all the same. A far better option (in my view anyway) is to simply invest in index funds.

Not all superannuation funds offer an indexed option, but many do. And you'll find the ones that do will be up to 10 times cheaper than the fund's default 'balanced' option.

It costs far less to invest your money in a couple of simple exchange-traded funds, such as iShares Core S&P/ASX 200 ETF (ASX: IOZ) and perhaps the Vanguard MSCI Index International Shares ETF (ASX: VGS), than employ a fund-managing team. And that's all an indexed option would typically do.

Not only do indexed options charge significantly lower fees, but they will also often outperform the balanced or even the 'aggressive' managed options, saving you money on two fronts. Remember, the difference between 1% and 0.1% over 45 years can be astronomical to a fund's final balance.

Foolish takeaway

Now, these aren't universal truths and you will need to do your own comprehensive research into whether this strategy would work for you. But it's a strategy I personally use and one I think is worthy of consideration for anyone who wants to maximise their super fund's potential.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Retirement

Smiling elderly couple looking at their superannuation account, symbolising retirement.
Retirement

How to retire early using ASX shares (even when starting late)

It's never too late to start investing.

Read more »

a mature aged couple dance together in their kitchen while they are preparing food in a joyful scene as the Breville share price rises on the back of a 25% profit surge
Retirement

Retirement income: 3 Australian dividend stocks to own for decades

Analysts think these shares could be good picks for retirees.

Read more »

Couple holding a piggy bank, symbolising superannuation.
Retirement

Is $500,000 enough to retire in Australia? Here's what the numbers say

Let's see where half a million would get you when it comes time to retire.

Read more »

An older couple use a calculator to work out what money they have to spend.
Retirement

Changes to deeming rate thresholds may boost your pension from tomorrow

The thresholds used to calculate deemed income from financial assets are going up. Here is the impact.

Read more »

Two people smiling at each other while running.
Retirement

From next week you can earn and own more while still qualifying for the age pension

The latest changes to the pension assets and income tests will come into effect on Tuesday.

Read more »

Joyful woman at a beach on the Gold Coast with her arms spread out.
Retirement

Aged 30 and earning an average wage? You're now set up for retirement. Here's how

A 30-year-old earning $75,000 per year for life will have enough for a comfortable retirement after 1 July.

Read more »

Two retirees looking through a window.
Retirement

Here's how much retirement costs per year if you're renting

The Australian Retirement Standard has introduced a living costs guide for retirees who rent their homes.

Read more »

Couple holding a piggy bank, symbolising superannuation.
Retirement

Passive income in retirement: Where to invest now

Here are three options for retirees to consider when building a retirement portfolio.

Read more »