Introduction
For many Australians entering retirement, superannuation often represents their biggest asset and the key to a comfortable future. Yet, successfully managing your super savings during retirement requires vigilance, as common super mistakes can significantly impact your financial security and retirement income.
This guide highlights every significant superannuation mistakes we’ve seen Australian retirees make, potentially costing them dearly. Understanding these pitfalls, from investment strategy missteps to issues with accessing super, is crucial for ensuring your super balance can support your retirement goals and last the distance, especially as many Australians are living longer.
Costly Super Mistakes: Fees and Multiple Accounts
Paying Excessive Super Fees
High fees can significantly diminish your retirement savings over time, often without you noticing. Paying even slightly higher fees on your super balance throughout your working life and into retirement can substantially reduce the final amount available to you. For retirees managing their super, understanding and comparing the fees charged by different super funds is crucial.
This is one of the most costly superannuation mistakes Australians can make. It’s vital to be aware of your super fund’s fee structure, which typically includes:
- Administration fees
- Investment management fees
Compare these fees with similar funds to ensure they are reasonable, as excessive charges directly erode your nest egg. If you have a substantial super balance, the impact of percentage-based fees can be particularly significant, potentially costing thousands over your retirement years.
The Pitfall of Holding Multiple Super Accounts
Holding superannuation across multiple accounts is a common issue for many Australians, often resulting from changing jobs throughout your working life. For retirees, this can lead to several problems that negatively affect retirement savings.
Maintaining multiple accounts means you are likely paying multiple sets of administration fees. Additionally, you might be paying for insurance premiums within these forgotten or inactive accounts, further reducing your retirement savings.
To mitigate these issues, consider the following benefits of consolidating your super into one account:
- Reduced administration fees
- Lower insurance premiums
- Simplified tracking of investment performance
- Easier management of your super during retirement
Consolidating your super into one super account can help reduce these unnecessary costs. You can use the ATO’s MyGov website to find any lost super accounts and begin the consolidation process.
Investment Strategy Mistakes: Poor Market Reactions & Timing
Reacting Poorly to Market Volatility (Switching After a Crash)
Significant fluctuations in investment markets can understandably cause concern for any retiree managing their superannuation. However, a common and costly mistake is reacting impulsively by switching investments to conservative options or cash after a market downturn has already occurred. Many super funds observed this behaviour during the market correction in 2020.
This reactive approach creates two major problems:
- It effectively locks in losses when investors move their super balance out of growth assets and into cash or conservative funds following a fall
- It often means missing out on the subsequent market recovery, as it’s very difficult to successfully time a switch back into growth assets before the upswing begins
History shows markets tend to recover, and staying invested according to your long-term investment strategy, even during volatility, is usually more beneficial.
Actively Trading or Trying to Time the Market
Another investment strategy mistake involves attempting to actively trade shares within your super account or trying to time market peaks and troughs. While the idea of buying low and selling high is appealing, successfully timing the market consistently over the long term is extremely difficult, even for professionals.
Evidence indicates that only a very small percentage of people manage to beat the market through active trading. This approach is particularly risky for retirement savings because:
- Making a few incorrect calls can lead to significant losses
- These losses can undermine the benefits of long-term compound growth essential for a comfortable retirement
Unless trading is your full-time profession, it’s generally advisable to avoid using your super for speculative share trading or attempting to predict market movements.
Investment Strategy Mistakes: Being Too Conservative
Many retirees make the mistake of shifting their superannuation investments into overly conservative options, such as cash, as they approach or enter retirement. While protecting your retirement savings is important, adopting an excessively cautious investment strategy can present significant risks.
This approach might seem safe, but it often fails to generate the growth needed to sustain your funds throughout a potentially long retirement. There are several key issues with being too conservative:
- Inflation erosion: Inflation poses a critical challenge during retirement, gradually eroding the purchasing power of your savings. Investments heavily weighted towards cash or low-yield options may not provide returns sufficient to keep pace with the rising cost of living.
- Longevity risk: Australians are living longer, meaning retirement savings need to last for potentially 20 years or more. Underestimating your longevity and choosing overly safe investment settings can jeopardise the sustainability of your super fund.
- Insufficient growth: A conservative portfolio may not grow enough to cover your income needs for the duration of your retirement, increasing the risk that you might outlive your savings.
Maintaining exposure to growth assets, such as shares and property, within a balanced portfolio is often necessary even during retirement. While these assets carry higher short-term volatility, they offer the potential for higher long-term returns essential for combating inflation and ensuring your superannuation lasts the distance.
Sticking with an Unsuitable or Underperforming Fund
The Cost of Poor Performance and Inertia
Staying with a superannuation fund just because it’s familiar can be a costly decision, especially for retirees. Research demonstrates this impact vividly: for instance, the Productivity Commission revealed that staying in a bottom-quartile performing MySuper product could result in a significantly lower retirement balance compared to being in a top-quartile fund.
Failing to compare funds or take proactive action may lead to substantial long-term financial loss. Simply put, inertia could cost you dearly over time.
Overlooking the Impact of High Fees
High fees represent a silent, slow erosion of your retirement savings. Most fund fee structures include components like administration fees and investment management fees, and failing to understand these can be an expensive mistake.
- Comparing fees: It’s crucial to compare your fund’s fees with those of similar funds to determine their reasonableness.
- Effect on long-term savings: Excessive charges directly reduce the super balance you have available for retirement income down the line.
If you have a larger superannuation balance, the impact of percentage-based fees becomes even more pronounced. In these cases, alternative structures like the fixed fees often found in Self-Managed Super Funds (SMSFs) may offer cost efficiencies. Evaluating how fees are calculated and whether another structure is more suitable is essential.
Neglecting Regular Performance Monitoring
Relying exclusively on fund managers or only glancing at annual statements can leave you unprepared. Many Australians fail to monitor their super fund’s performance regularly, leading to unpleasant surprises closer to retirement.
To avoid this, you should:
- Track your super balance growth year by year to ensure it aligns with your goals.
- Understand how your super is invested across different asset classes.
- Actively check its performance to ensure your strategy remains on track.
Regular oversight is imperative to ensure a smooth and secure retirement.
Fund Mismatch with Changing Goals
Your financial goals will evolve as you move through different phases of life, particularly as you approach and settle into retirement. A super fund or investment strategy suitable during your working life may fail to align with the unique demands of retirement.
Periodically reevaluating your fund can help you ensure:
- It matches your current objectives, balancing factors like consistent growth versus secure, lower-risk options.
- It supports your evolving need for investment control or priorities over time.
Misinterpreting Fund Labels like “Balanced”
Label-based decision-making is a common pitfall when selecting or sticking with a super fund. Terms like “Balanced” might seem reassuring but can be highly misleading. These labels lack uniformity, with the asset allocation of a “Balanced” fund varying widely across different providers.
For example:
- One fund’s balanced option may heavily favour growth assets like shares and property.
- Another fund may have a more conservative split between growth and defensive assets.
Rather than relying solely on labels, examine each fund’s detailed asset allocation. Consider both the risk and the potential return to determine if the fund aligns with your risk tolerance and retirement strategy.
Investment Strategy Mistakes: Being Too Conservative
Failing to Account for Inflation Risk
One of the most significant errors retirees make is underestimating the impact of inflation on their savings. Choosing overly conservative investments — such as cash or other low-yield options — often results in returns that fail to keep pace with the rising cost of goods and services. This mismatch, compounded over a potentially long retirement, can significantly reduce the purchasing power of your superannuation, directly impacting your standard of living.
To avoid this, ensure your investment strategy accounts for inflation. Without adequate growth from your assets, the effects of inflation may erode your financial capacity over time, making it challenging to maintain your desired lifestyle in later years.
Underestimating Retirement Longevity
Australians today are living longer than previous generations, with retirements lasting 20, 30, or even more years. Many retirees adopt overly cautious superannuation investments, failing to consider this extended timeframe.
This approach carries severe risks:
- Insufficient returns: Conservative settings may not generate the returns necessary for your savings to last across decades.
- Risk of outliving funds: Failing to match your strategy to your potential lifespan increases the danger of exhausting finances during retirement.
Opt for an investment strategy that acknowledges your likely longevity by incorporating growth-oriented investments to sustain your income needs throughout retirement.
Avoiding Growth Assets Entirely
While reducing volatility is a common goal for retirees, avoiding growth assets — like shares and property — entirely can result in missed opportunities for capital growth. Many retirees shift completely into defensive options such as cash, believing this approach ensures financial security. However, this overly cautious strategy significantly reduces the potential for higher long-term returns essential for a sustainable retirement.
A more effective approach typically includes a balanced mix of growth and defensive assets:
- Risk management: A deliberate allocation between asset classes helps to mitigate investment risks.
- Capital growth: Growth assets provide the potential for higher returns, essential to combat inflation and sustain a long retirement.
Complete reliance on conservative options might provide short-term reassurance but can jeopardise financial security in the long run by failing to address key risks like inflation and longevity.
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Mistakes in Accessing and Using Your Super Savings
Delaying the Switch from Accumulation Phase to Pension Phase
Many Australians delay moving their superannuation from the accumulation phase to the pension (decumulation) phase upon retirement. While this is a personal choice, remaining in the accumulation phase unnecessarily can come at a significant financial cost.
The key difference between these phases lies in their tax treatment:
- Earnings on funds within a pension phase account are generally not taxed
- Conversely, earnings within an accumulation account are typically taxed at 15%
Failing to transition to an available pension phase means potentially missing out on this tax-free environment for investment earnings each year.
Withdrawing Large Lump Sums Inappropriately
Taking significant lump sums out of your superannuation to hold in cash bank accounts is another common mistake retirees make. While having accessible cash provides comfort, this decision is often driven by emotion rather than financial strategy.
Holding large amounts of cash can have several disadvantages:
- Missing out on potentially higher investment returns available within the super system
- Losing the benefits of the tax-advantaged pension phase
- Reducing long-term growth potential
For example, while a term deposit might offer a certain return, super fund investments, although carrying different risks, often generate higher returns over the medium to long term, which are tax-free in pension phase.
Under-Spending Due to Fear of Running Out of Money
A significant fear for many retirees is outliving their retirement savings, driven partly by increasing life expectancy for Australians. This concern often leads to the mistake of being excessively frugal and drawing down less income than they could comfortably afford.
This under-spending has important consequences:
- Retirees may not fully enjoy their retirement years
- Many end up drawing only the minimum required amount from their super balance
- Substantial amounts may be left as unintended inheritances rather than being used to fund their lifestyle
Overlooking Insurance Needs Within Super
Not Reviewing Cover Held Within Super
Nearly 70% of insured Australians hold life insurance through their superannuation funds, according to APRA. However, many make the mistake of treating super and insurance as entirely separate matters and fail to review their insurance policies regularly, particularly as they approach or begin retirement.
It’s essential to periodically review the insurance cover held within your superannuation to ensure it aligns with your changing circumstances. This includes understanding exactly what policies you have—such as death, total and permanent disability (TPD), and income protection cover—and determining whether they remain appropriate for your retirement needs.
Paying Premiums for Unnecessary Cover
Continuing to pay for insurance you no longer need can be a costly mistake. As your financial situation changes in retirement, your insurance requirements may reduce—particularly if debts have been paid off or dependents are now financially independent.
- Ongoing costs: Insurance premiums deducted directly from your super fund reduce the balance available for your retirement income.
- Need for regular assessment: To protect your savings, regularly evaluate whether retaining specific insurance policies is worth the cost and if the coverage still aligns with your current circumstances.
Reducing or cancelling unnecessary cover can preserve your super for its intended purpose: funding your retirement.
Having Inadequate Insurance Protection
While some retirees overspend on unnecessary cover, others face the opposite issue—having insufficient insurance. A Financial Services Council report from 2022 revealed that a large number of Australians lack adequate death, TPD, or income protection cover.
Assuming your existing cover is sufficient without reviewing the details can be risky. To ensure you are adequately protected:
- Check coverage details: Assess whether the payout would address outstanding debts and support your family’s future living expenses in the event of death, disability, or illness.
- Verify suitability: Ensure that income protection policies accurately reflect your current role, especially if you are still working part-time during retirement.
Striking the right balance between adequate protection and cost-saving measures is key to safeguarding your financial and personal well-being in retirement.
Missing Out on Beneficial Contribution Strategies
Believing Contributions Stop After Retirement
A common misconception is that superannuation contributions must end when you retire or stop working. This misunderstanding often leads to missed opportunities to grow your retirement savings or manage your tax position effectively.
In reality:
- Non-concessional (after-tax) contributions: These can generally be made up until age 75, regardless of work status.
- Concessional (pre-tax) contributions: These are typically allowed up to age 67 without needing to meet a work test and could be extended beyond that age if you satisfy a work test (usually 40 hours worked within a 30-day period).
Understanding and leveraging these rules can help retirees continue building their super balance, even post-retirement.
Overlooking Downsizer Contributions
Many retirees remain unaware of the downsizer contributions provision, which can significantly enhance their super balance. If you sell your principal residence (owned for a qualifying period), you may be eligible to contribute a substantial portion of the sale proceeds into your superannuation.
Advantages of downsizer contributions include:
- Exceeding regular contribution caps: Unlike other contributions, this type is not subject to the usual caps.
- Bypassing total super balance restrictions: Downsizer contributions are not limited by the balance limits applicable to non-concessional contributions.
Missing out on this opportunity when selling your home could mean forgoing a valuable option to boost your retirement funds significantly.
Misunderstanding Carry-Forward Contribution Rules
The carry-forward rules for concessional contributions provide another underutilised strategy. These allow eligible individuals to use the unused portion of their concessional contribution caps from previous years, enabling larger deductible contributions in years when circumstances permit.
Key aspects to remember:
- Eligibility requirement: Your total super balance must have been below $500,000 on the 30th of June of the previous financial year to qualify.
- Timing consideration: Many retirees mistakenly believe eligibility depends on their balance at the time of making a contribution, rather than on the preceding financial year.
Failing to understand these nuances can lead to missed advantages in maximising tax-deductible contributions.
Not Utilising Younger Spouse Contribution Strategies
For couples where one partner is younger and still under the Age Pension age, specific strategies involving the younger spouse’s superannuation are often overlooked. Contributions made to the younger spouse’s super account (remaining in the accumulation phase) may offer several advantages.
Points to consider:
- Centrelink asset test exemptions: Super held in the accumulation phase by individuals under the Age Pension age is generally exempt from Centrelink’s assets test.
- Strategic contributions: Directing contributions into the younger spouse’s account can not only help maximise Age Pension entitlements but also support long-term financial planning, provided contribution limits are observed.
Missing such strategies can mean losing an opportunity to enhance financial outcomes for the couple in retirement.
Mistakes in Going Down the SMSF Route
Setting Up an SMSF with Insufficient Balance or Expertise
Establishing a self-managed super fund (SMSF) without adequate funds or the necessary knowledge can be a significant mistake for retirees. While being in charge of your own super sounds appealing, SMSFs are not suitable for everyone. Research suggests that minimum balances are needed for an SMSF to be cost-effective compared to industry or retail funds.
Thresholds vary, but some studies indicate potential issues for SMSFs with balances below certain levels:
- One analysis found that SMSFs using full administration services generally need around $200,000 to compete on costs.
- A 2022 report from the Productivity Commission noted that SMSFs with balances under $500,000 tend to underperform compared to public offer funds.
Beyond the balance, retirees must consider if they possess the required time, interest, and financial expertise to manage your super effectively within an SMSF. Lacking these can lead to poor investment decisions or compliance breaches. Therefore, seeking financial advice before setting up an SMSF is crucial.
Underestimating SMSF Costs and Responsibilities
Another common error is underestimating the ongoing expenses and significant duties involved in running an SMSF. Retirees must take responsibility for the regular management of investments and ensure the fund complies with superannuation laws. This requires a serious commitment of time and effort.
The ongoing costs associated with an SMSF include:
- Accounting fees
- Annual audit fees
These costs can be substantial, particularly relative to smaller superannuation balances. As a hypothetical, consider Jonathan and Emma, who set up an SMSF with $200,000 primarily for term deposits. They faced annual accounting and auditing fees of $3,500, which significantly impacted their low returns. Additionally, they encountered complexities regarding minimum pension payments and contribution rules that they weren’t equipped to handle.
Furthermore, trustees face legal responsibilities and potential penalties for non-compliance. Misunderstanding these obligations or being misled about accessing super early (which is illegal) can lead to severe consequences. Thus, it is vital to fully understand the costs and commitment before deciding if an SMSF aligns with your personal circumstances and retirement goals.
Conclusion
Navigating retirement requires avoiding costly superannuation mistakes, from paying high fees and making reactive investment decisions to errors in accessing your super balance or overlooking insurance needs. Understanding these common pitfalls, including unsuitable fund choices or SMSF complexities, is crucial for ensuring your retirement savings last the distance and support your retirement goals.
To confidently manage your superannuation and avoid these potential setbacks, consider seeking professional advice tailored to your personal circumstances. Contact Money Path in Adelaide today for trusted expertise from a financial adviser to help secure your financial future and make the most of your retirement savings.
