The Shocking Effect of Fees on Your Superannuation Balance
Shhhh…. we are going to tell you the fund manager’s dirty little secret.
A seemingly low fee of 2.00% can take away 30% of your super over 25 years. Seems unbelievable doesn’t it? How can it be? Well two reasons. Firstly, is the annual loss of growth, if your fund returns 4% a year, then a 2% free is actually taking a half of your profits each year. Second is the opportunity cost of that 2% that would have otherwise stayed in your super pot and been allowed to compound. Over your lifetime this adds up to a huge chunk of your savings you are missing out on.
Try this fee cost calculator out and see what a difference the small fee percentage makes to your final fund balance:
So what can you do about it?
You can’t control the returns of the stock market, but what you can control are the fees you pay to be invested in the stock market. As our example above illustrates this can have a dramatic effect on the size of your super over your lifetime.
Just because a super fund charges more in fees does not ensure they provide better performance. In fact exactly the opposite has been shown to be the case, mainly because fees are charged on your entire balance and so are taken from your fund whether it does well or not each and every year.
The discrepancy in fees of 2-3% may not seem that big, but the effect these have on your final balance is huge. For example the default fund choice for Australian Super charges 0.66% in fees, whereas the default fund choice for AMP Customer Super charges 2.17%. (Source: www.superratings.com.au/) Assuming both funds performed the same over 30 years for someone on an income of $100,000 per year, ignoring any tax and with investment growth of 5% pa:
The balance in Australian Super would be $564,100.74
The balance in AMP Customer Super would be $439,722.47
A difference of $124,378.27 just by choosing a fund with lower fees.
What would you do in retirement with an extra 100 grand? The difference is even more profound over a longer time horizon.
Industry super have a calculator to compare super funds and list their fees here:
Check the fees on your superannuation fund & don’t be complacent. Your future self may well thank you.
Peter Barber 2014
Peter Barber, developer of finance apps and programs has some sound advice for us about asking some questions of our superannuation or retirement fund manager. Questions such as: Whose car am I paying for? Yours or mine?