A Super Strategy
Every time there is a significant market event I have friends ask me the same set of questions. Why is this happening? Is it too late to sell? I don’t have any shares, should I care? The more important question is – how could I have avoided this? Better still – think the stock market doesn’t affect you? Think again.
Prerequisite reading: The Matrix.
Foreword: In my friendship group there are two types of people. 10% are interested in the stock market. Know what an ETF is and buy and sell shares. The other 90% have never traded in their life, think a bear market is where you can buy a bear and don’t really understand what I do at Marcus Today. Should that group be interested in the stock market? If they are 30 years old they will on average have $50,000 in their superannuation account. Where is that money invested? In the stock market! The performance of their super and the amount they will retire with are highly dependent on it. This article is focused on them.
PART 1: SHOULD YOU CARE?
Working in the stock market, the only time I get asked for advice from friends is when there’s a major correction. The same question always comes up: “Is it too late to sell?”. It happened last month (tariff tumble), it happened last year (carry trade three day flush) and would have happened in Covid. When you can see an account with thousands of dollars dropping 5% in a day, this question isn’t surprising. The question no one asks (but should): “How could I have avoided this?” Even more important: “What difference would it make to my retirement by asking that question?”.
I know most people under 35 struggle to look far ahead enough to care. When half of my friends are wondering how they will be able to afford a house or start a family, you can forgive them for not paying much attention to something that automatically gets taken out of their payslip and can’t be touched for another 30 years. The purpose of this article is to say “you 100% should care”.
Given the fabulous opportunity my generation has from super – tax benefits, long runway, the eighth wonder of the world (compounding interest), considering we ‘missed’ the housing market boom, it is worth investigating the full potential of what your balance could be upon retirement. I used to be an engineer, so let’s do a few simple calculations and see what difference each % return makes over the course of a work life.
To simplify the formula, I’ve made the following (conservative) assumptions:
- Starting point is a 30-year-old with a salary of $100,000 and super balance of $50,000.
- Mandatory employer super contributions of 12% ($12,000 each year).
- Salary only increases by 2.5% p.a. This is the wage price index average over the last 10 years. Doesn’t therefore account for any promotions over the course of a working life.
- Retirement age of 65 (it will likely be higher in 35 years’ time).
The chart below shows the final super balance you can expect after year 35 with an 8% return. Both the S&P 500 total return index and All Ords Accumulation index average 9-11% (over 30Y) but you have management and administration fees to include.
That aside:
- For high single-digit returns, each % change results in a retirement balance difference of ~$800k.
One percent makes a huge impact in other words when your runway is 35 years, and again, this is a conservative estimate.
The good news is even with 8% average return you’ll be retiring with ~$3.5 million. You can see why the government has been steadily trying to increase the mandatory super contribution (goes from 11.5% to 12% in July). If every Australian had the above hypothetical work life there would be no need for the pension. Last FY it accounted for 37% of all government spending. Assuming an inflation rate of 2.5% (the average in Australia for the last 10Y), this $3.5 million equates to a present value of $1.45 million. Not bad. Marcus once estimated how much you really need to retire was around $2 million. Time to ask for that promotion!
Sounds OK, BUT. There are two catches. This calculation assumes 100% of your super is invested in either the S&P 500 total return or the All Ords Accumulation index. Something most super companies will call ‘high risk’ and try talk you out of. The average ‘balanced’ Australian superannuation account only has 35% invested in international equities and 30% in Australian equities. The rest is private equity, infrastructure, property, fixed interest and (dare I say it) cash. If you’re in a balanced super account your return could shrink from ~8% to ~6% (‘defensive’ drops it to 5%!), and that $1.45 million retirement fund falls to $0.9 million. Probably enough to live on. But not enough for the European holiday, grand-children school fees or kitchen renovation.
In short:
- Have your super in ‘balanced’? That will cost you (at minimum) $500k.
- Have 5% in cash? That will cost you $127k.
- Have any exposure to cyclical sectors like resources? That will (probably) cost you $200k (resources are for medium-term trading, not buying and holding for 35 years).
To combat this you need to switch to a 100% equities investment strategy. Check your current provider allows this. If not. Time to move.
The second catch…tax. Cannot be ignored but I’ll try keep it simple. All contributions to super (below the $30k pa concessional cap) are taxed at 15%. All realised investment gains are taxed at 15% (I’m not assuming shares will be held for longer than 12 months, so no 50% CGT concessions). All in all, this is far better than paying at your marginal rate but is still significant.
Factoring in these rates, your $0.9 million in a balanced fund drops to just $670k.
PART 2: THE ROCKET
$670k doesn’t sound like much, so now we ask – can you do better?
The next chart shows the final super balance you can expect after year 35 for four different returns ranging from 8% to 14%. At 14% the balance jumps from $3.5 million to $15 million or from $1.4 million to $6.2 million in today’s terms. At 18% the line would look like a rocket.
Accounting for the tax rates above these are the final balances and net present value for returns ranging from 8% to 14%.
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And the difference one percent makes now?
- For low double-digit returns, each % change results in a retirement balance difference of ~$1.1 million.
Why does all this matter? Is 14% possible?
The Marcus Today Strategy Portfolio has returned ~20% since inception in 2018. We can’t guarantee future returns will match past returns of course but even taking 12% – your retirement super level will go from $2.3 million to $5.2 million ($2.2 million present value) and that’s not even touching on voluntary contributions. All hypothetical of course. No one knows the future but if you had the opportunity to increase your returns why not take it?
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CONCLUSION
Three things for you to do:
- Subscribe to Marcus Today and start following the Strategy Portfolio.
- Find a superannuation company that gives you more control. Not allowed to tell you which ones but there are a few out there. They allow you to buy and sell ASX-listed ETFs in the same manner as trading with your regular money. They also let you buy Australian shares (usually just ones in the ASX 300). This brings more relevance to our Growth Portfolio. PME anyone? Alternative is a self-managed super fund but that involves a lot of paperwork.
- Check in with the Strategy Portfolio bullets once a business day. A lot of work? No, they are usually just a 1–2-minute read. You can even sign up for email trade alerts now.
Bonus: If you want to become a better self-guided investor. Read Market Strategy a few times a week. We call it learning by osmosis.
Oliver Matthew
Senior Analyst & Editor