Articles & Questions
Every week I publish a fun new article on a money topic I think you’ll find interesting. I also answer a handful of reader questions. Subscribers to my newsletter get to see everything first — but you can browse some of my past articles & questions on this page.
My Best Articles
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I won $250,000 on a Gameshow
Hi! Recently, I was lucky enough to win $250,000 on a gameshow!
Hi!
Recently, I was lucky enough to win $250,000 on a gameshow! Since winning, I have paid off a loan I owed my dad and and put the rest into our mortgage -- the house is valued at $320,000. I have just bought a new car and paid for it out of my home loan. The balance is now $95,000. We intend to start a family inside the next 12 months and are scouting for investment properties (we earn $110,000 combined). I am very excited but also confused about whether buying another property is wise at this point in our lives.
Mike
Hi Mike
Congratulations for winning Family Feud and killing Channel Ten (just kidding). If I were in your shoes, and planning a family within 12 months, I’d focus on three things: First, boost your pre-tax super contributions to 15 per cent of your gross income. Second, save up three months of living expenses in a Mojo account. Third, take a baseball bat to your mortgage. If you can be debt free by the time your first kid goes to school, you’ll have dramatically less Family Feuds.
Scott
We Can’t Sleep at Night
Hello Scott, My husband and I are on the age pension and receive $2,200 per month. We also receive an overseas pension of $700 a month.
Hello Scott,
My husband and I are on the age pension and receive $2,200 per month. We also receive an overseas pension of $700 a month. We have a combined super balance of $32,000 and a home worth $600,000.
We owe $25,000 on our car, $24,000 on our home, and $25,000 on a bank overdraft (we used to have a business but it collapsed). We are considering borrowing $100,000 for debt consolidation, paying off the car and overdraft, putting some into our home loan, and topping up our super with the balance. The payments on such a loan would be $600 per month (based on current interest rates). Please help, as this is leaving me anxious and sleepless at night.
Kathy and Kevin
Hi Kathy and Kevin,
You’re going to struggle to get a $100,000 loan when you’re on the pension, and with good reason:
Pensioners can’t afford to be repaying debts!
If I were in your shoes, I’d downsize your home, pay off all your debts, and keep the money in super as a backstop.
Otherwise you could: withdraw your super as a lump sum and pay off the highest-interest debt. Then both of you could go back to work a day or so a week (combined you can earn $13,000 each before it affects into your Centrelink pension), and possibly rent out a room until you’re debt free.
Good luck.Thanks for reading.
Scott
The $31,203 Road Test
Are you looking for Australia’s biggest and best super fund? Well, that’s what we’re going to cover today.
Are you looking for Australia’s biggest and best super fund?
Well, that’s what we’re going to cover today.
You see, the front page of the Australian Financial Review this week said that NAB is the new king of super, claiming the bragging rights of Australia’s biggest retail super fund.
It’s a fair bet that either you, or one of your family, or at least one of your ex-boyfriends, is with NAB.
Now I wouldn’t be doing my job if I didn’t do a road-test on Australia’s biggest retail super fund. So buckle up (because I’m also going to show you how to make $31,203).
Guaranteed.
The Holden Cruze of Super Funds NAB’s super offering (from this week, branded as ‘MLC Super’) is the financial equivalent of a Holden Cruze.
No-one consciously chooses a Holden Cruze.
It’s just the car that the bored middle-aged woman behind the counter of Budget rent-a-car hands you the keys to. The Cruze is a car that’s foisted upon you. Eventually you’ll get a better one, but right now, well, who gives a toss?
That explains NAB’s super offering right there.
No-one actually does independent research and chooses a NAB fund.
That’s because their performance over the years has been, well, Cruze-like.
According to SuperRatings, over 1, 3, 5 and 7 years, it’s come in near the back of the pack.
That perfectly explains NAB’s hierarchy of needs, which are as follows:
NAB.
NAB Funds Management.
NAB Financial Planner.
NAB Banking (investment loan, mortgages, and credit cards referrals).
Client.
Holden versus Ford
Yet rather than just kick the tyres and drive around the block, I thought I’d line it up in a proper drag race against Australia’s biggest super fund.Hang on, didn’t I say NAB was the biggest?
No, there’s a difference. NAB has been crowing about being the biggest retail super fund (which means it’s run by a financial services company for profit).
The biggest super fund is AustralianSuper, which is an industry fund (i.e. not for profit). It manages $100 billion on behalf of more than 2 million members.
Retail funds have been battling industry funds for years (a real Ford vs Holden battle).
Up until now, industry funds have been out in front, mainly thanks to their lower fees.
Still, the entire industry is as seedy as a night at the dishlickers: Australians are still forking out some of the highest super fees in the world - between 2004 and 2013 the cost of the average fund fell from just 1.4% to 1.2%, even though the total super pool grew from $625 billion to more than $1.6 trillion.
To look at, there’s not much difference between our NAB and AustralianSuper contenders. We’re looking at the ‘balanced’ model for each, which means you’ll get a mix of shares (both Aussie and International), a bit of property, and some bonds and cash.
Where they differ is the sticker price.
AustralianSuper is the poverty pack. You’ll pay an investment fee of 0.57% (which gets the Barefoot rating of “meh” as it’s not the lowest in the market -- not by a long shot), plus a $1.50 per week admin fee. Anyway, on a balance of $50,000, that’s costing you $363 each year.
Now for NAB …Their cheapest option will set you back $623 per annum on the same $50,000 balance.
Next in line is their mainstream model (with leather trim), called ‘MLC Masterkey Fundamentals’, which ups that slightly to $630.
Or, if you’re unlucky to be stuck in one of MLC’s older funds (but still called ‘Masterkey’), get ready to fork out $1,033 in fees every year on a $50,000 balance.If you (or your dad or your uncle) are still in that fund, then somewhere along the line a NAB salesperson took your boss to the corporate box at the footy and got them on the squirt -- in exchange for signing up his entire staff up to a stinker of a corporate super fund.
But maybe that’s about to change ...
“National Australia Bank is combining five of its superannuation funds to create the country's biggest retail fund, promising to share cost reductions from the merger with its 1.3 million super members” said the newspaper this week.
Huh?
“Promising to share cost reductions?”
That didn’t sound very banklike, so I rang up NAB and asked them “specifically how much are you sharing?”
“The majority of our Corporate Super members will receive a 0.04% reduction to their fees… that is the equivalent of $20 per annum on a $50,000 MySuper account balance” said the NAB spokesperson.
That sounds more like it!
The $31,302 Car Crash
When it comes to cars it’s not the driveaway cost that slugs you, what you really need to focus on is your running costs, over years and years and years … it’s the same with super. Let me explain.
Take a kid -- let’s call him Freddy Falcon -- with $10,000 in AustralianSuper.
He’s earning $60,000, and keeps his nose to the grindstone for the next 40 years.When he retires his super balance will be (based on very, very conservative projections)... $286,517 in today’s dollars.
His mate -- Harry Holden -- has the same $10,000, but he goes with MLC MasterKey Super Fundamentals.
He earns the same as Freddy, and works just as long.
And when he clocks off at 60, he’ll pocket $255,314.
In other words, despite being in a balanced fund just like Freddy, he’s $31,203 worse off.
Struth!
That’s enough savings to buy you a Holden Cruze… though I wouldn’t recommend it.
Tread Your Own Path!
The Ticking Time-Bomb in Your Super Fund
I’ve never told you this before. If you think you’re close to ‘kicking the bucket’ (well, 55 and over), you need to read this.
I’ve never told you this before.
If you think you’re close to ‘kicking the bucket’ (well, 55 and over), you need to read this. And if you have someone in your life who’s in the bucket-kicking zone, you should share this column with them -- because it will save them a lot of heartache, stress and money.
I’m going to explain how the average retiree in this country gets screwed over by their super fund when they retire. And I’ll show you the simplest way to safeguard your savings when you retire.
Let’s begin.
One of the bravest things I’ve done in my adult life was to take my bride to the pub in the weeks leading up to our wedding day. Once seated, I scribbled our lifetime financial plan on the back of a serviette.It consisted of me drawing three buckets:
Blow Bucket: all our living expenses, including house repayments (this bucket has a hole in it).
Mojo Bucket: three months of living expenses (this bucket gives you a feeling of safety and security).
Grow Bucket: superannuation, investment properties and shares (this bucket makes you wealthy).
And then I drew a tap above the buckets, which represented our income that we could pour into the three buckets.
The reason my three-bucket strategy is so powerful is that it’s so simple. It keeps you on the same page financially throughout your marriage. However, after talking to hundreds of Barefooters (and my parents), I’ve discovered that it can fall apart when you retire -- when you turn off the tap.
Kicking the Bucket
The big mistake most people make is putting all their money into the one bucket when they retire -- super. In most cases, your super fund will automatically invest your life savings into what they call their ‘balanced option’.
Question: What does ‘balanced’ mean?A good guess might be that riskier assets like shares would be balanced out by safer assets like cash and fixed interest.
Wrong.
The average Aussie super fund has more money invested in shares than in almost any other country in the world, according to a study by financial outfit Mercer. It varies from fund to fund, but right now your balanced fund could have as much as 70 percent of your money invested in shares.
Of course, over the long term, shares outperform every other asset class, so having a default fund chock-full of stocks is a very good thing if you’re a young Playboy Bunny … but not so good if you’re old Hugh Hefner.
As the big Texan, Dr Phil, would say, “how’s that work’n for ya?”Great … at the moment.
“The average super fund has delivered 9.5 per cent over the last seven years”, a press release from SuperRatings says.
Hang on, why are they only talking about seven years of returns?
BECAUSE THEY DON’T WANT TO TALK ABOUT WHAT HAPPENED IN THE GFC.
So let’s talk about the GFC, and the heart palpitations and wealth destruction it caused retirees who had all their savings tied up in the one very unbalanced bucket.Here’s another question for you:
Guess which country suffered the biggest losses on retirement savings during the GFC?Iceland.
Guess who was the second biggest loser?
Australia.
Yes, the Organisation for Economic Co-operation and Development (OECD) found that our superannuation funds lost a larger share of their members’ funds than any other pension system in the world -- with the exception of Iceland.
But let’s not be too cocky. There’s no glory in beating Iceland for the wooden spoon. Seriously, even being put in the same sentence as Iceland is embarrassing: relative to its population, this fishing village masquerading as a country suffered the single largest banking collapse in history, which left it in a severe economic depression.
So the $64 billion question is, how can Aussie retirees like you avoid this happening when (not ‘if’) the next GFC happens?
Answer: Go back to the buckets.
The Three-Bucket Retirement Solution
Take your partner to your local (and take advantage of $5 pensioner parma night).
Grab a serviette and draw the three buckets, and explain that this is how you’re going to safeguard your savings as a couple throughout our retirement. Like Goldilocks, it’ll ensure you don’t take on too much or too little risk, but get it just right.
The ‘Blow’ bucket is still where you draw your day-to-day expenses, and that should be in cash.
Your ‘Mojo’ bucket is where you get your safety and security. Throughout your working life, it should sit at three months of living expenses. When you retire, you should boost your Mojo bucket to three to five years of living expenses (factoring in any age pension you receive).
If you’re a Collingwood supporter, you’re probably quite comfortable with losing, so you may only need three years of living expenses. If you’re a nervous type, shoot for five years of living expenses.
Here’s the thing: knowing that you have three to five years of money socked away is going to save you from a lot of sleepless nights when the markets get rocky. The last thing you want to do is watch your investments crash, panic, and sell them all at the bottom of the market -- just because you’ve got no cash to live on. It’ll buy you time to ride out the storm, when your shares will rebound.And remember, be conservative with your Mojo -- a nice balance of cash and fixed interest (even though interest rates are low). With Mojo, we’re chasing a different type of return: peace of mind.
Your ‘Grow’ bucket is where the remainder of your money should be invested. Specifically, it should be invested it in good-quality, dividend-paying shares (or share funds) within your super. And, most importantly, you want to direct the dividends from your Grow bucket to automatically flow into your Mojo bucket -- so you’re always automatically replenishing your Mojo.
In retirement, with your income tap turned off, your biggest risk is that you’ll outlive your savings. You need to stay ahead of the rising cost of living, and historically the safest way to do that is by investing long term in the share market (Grow) while still protecting yourself (Mojo).
Right now, the GFC is a distant memory.
Right now, the US market is on the second longest upswing in stock market history.
That’s why the time to set up your retirement buckets is right now.
Tread Your Own Path!