If there is an upside to the current period of ultra-low interest rates, it is the spotlight it shines on fees. After all, when your superannuation is flying upwards by 30% a year, you are unlikely to miss a 2% management fee.
That situation all changes when all of a sudden rates of return compress – something that is happening at the moment and even getting 1% for savings in the bank is a very difficult task.
All of a sudden 1% is nothing to be sneezed at and keeping a laser like focus on costs seems vital.
The same applies to mortgage rates, credit card fees, personal loans, financial planning fees, brokerage, wrap fees, insurance and a raft of other everyday costs from electricity bills and internet costs to mobile phone plans and car leasing.
With returns so low, every small saving in fees or interest rates can absolutely transform the return you are getting.
Superannuation a great place to start
Let’s have a look at superannuation, for example, because it is often neglected despite usually being the second largest investment behind the family home.
If you are lumbering along in a default fund that was effectively chosen for you and may not suit your investment objectives at all, the chances are that you are missing out on potentially hundreds of thousands of dollars of retirement income that could absolutely transform your life.
Starting with management fees, if your fund is charging 2% of your superannuation balance to invest your money, that represents a massive missed opportunity for you.
There are many highly reputable funds that charge 1% or less in management fees and that 1% saved is an absolute fortune over time, because the fees withdrawn are gone forever and are no longer compounding with your super.
Percentage fees are a big trap
Indeed, the whole concept of percentage-based investment fees is a dirty little secret in the funds management sector – it costs virtually the same amount to invest $100,000 as it does to invest $1 million, but you pay ten times more if you have the larger amount.
Nevertheless, we need to work with the system we have – while working to get it changed – so the absolute imperative with your super is to get into a fund which charges 1% or less and has competitive five year returns and a solid investment process and record.
The next thing to check is your investment objectives to ensure that your super is working as hard as you do.
In general, if you are young and a long way from retirement you should have the most aggressive investment option you can live with that allows you to sleep at night.
You may suffer some years with negative returns but over the long term your return should be much higher.
If you are older and approaching retirement, the reverse applies because you do not have as many working years to recover from losses.
Having said that, even an older worker should still have a reasonable proportion of growth assets such as local and offshore shares and property in your superannuation, given the number of years the average retiree will spend in retirement.
Keep an eye on insurance
The final thing to examine in your superannuation is insurance, which usually comes in three types – death cover, which is sometimes called life insurance, total and permanent disability insurance (TPD) and sometimes income protection insurance.
Usually death cover and TPD are bundled together and in superannuation accounts are usually offered automatically as part of a bulk or group deal with an insurance company or underwriter.
Income protection insurance is usually an add on product that is not automatic but can be added for an additional premium.
Often these policies are cheaper than an individual could source outside super and they also come with the benefit that no medical examination or provision of health information is required.
Having insurance within super is a great idea because you can often get good coverage at economical “bulk” rates and the premiums are more tax effective.
Still, you need to ensure that the insurance within your super fund is tailored to your needs and not too expensive or unnecessary.
Start with super then progressively check all fees
In the long-term, insurance costs are reducing the amount of retirement income available so it important that policy premiums are kept to a minimum by ensuring that the amount covered is appropriate – usually a multiple of your current salary.
Once you have ensured that the fees and insurance coverage in your super are appropriate, it is a good time to apply the same approach across the range of investments and costs that you have – starting with the largest and working down from there.
In an ultra-low interest rate environment, it is vital to keep an eagle eye on costs and review all of your bills and investments to ensure you are getting the best deal possible.
Minimising costs is one of the few ways of producing a guaranteed return that in the case of super or other investments is able to multiply and compound over time so a little bit of effort now can really pay off in the long term.