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How much do super fund fees affect retirement income? The short answer: A lot. Most investors could be losing 4 to 7 years of their retirement income to fees, according to our analysis. What would that mean to your retirement plans? Many individuals have their super in their employer’s default fund. And if you’re like most people, you have collected several funds as you have progressed through your career. However, few people have considered the importance of the critical factor of fees in determining whether they will achieve the ultimate goal of their super – to retire when they wish with sufficient money for a comfortable life.

What are typical super fund fees?

According to consulting actuaries, Rice Warner, when looking at all super fund types, the average fees charged for a super fund, was 1.2% of fund assets. However, while the average fees seem reasonable, the detail of the report proves that super fund fees can vary markedly between super funds – with some category averages as expensive as 2.3%. We repeatedly see clients paying more than 2% in super fees. And if you think a Self Managed Fund is the answer, you may need to think again. Typical fees for an SMSF, according to Rice Warner, were similar to that 1.2% average. And interestingly, even industry funds – which market low fees as a key differentiator – are shown by Rice Warner to have have fees in line with the average of 1.2%.

What is the impact of fees on retirement income?

To measure the effect of fees, we considered three price points as reasonable representations of what most people are paying each year: a low fee of 0.70%, a mid-range fee of 1.35% and a high fee of 2.0% – in each case a difference of 0.65%. Let’s take a hypothetical investor, Lindsay. She is age 45, plans to retire at age 65 with an annual personal income of $60,000 each year. She earns an annual salary of $200,000 and has a balanced portfolio returning average returns each year of 7%. In the first instance, we have assumed Lindsay has contributions of super guarantee only (currently 9.25%). If Lindsay had a super fund with mid-range fees, the additional 0.65% difference over the low fee rate would reduce the amount of her retirement income by 4 years. However, if Lindsay had a super fund with 2% per annum fees, the fee difference of 1.35% (compared with our low rate) eliminated almost 8 years of retirement income. That is a very material loss of retirement assets and lifestyle income – and it is solely due to fee erosion.

Save more, pay more

Now, if we assume that Lindsay is a high saver – and each year salary sacrifices to the maximum limit (which will be $30,000 from 1 July 2014). In this case, paying mid-range fees means that Lindsay loses 7 years of retirement income. Pay high fees of 2%, and Lindsay loses another 5 years again – a total of 12 years of retirement income lost to fees. So, despite diligently squirreling away savings for many years, paying unnecessary fees creates a significant reduction in retirement assets and lifestyle income.

Don’t risk losing years of retirement income

If you would like to review your super, please contact us (02 9262 6045). It’s worth achieving lower fees and reclaiming years of valuable retirement income.

Rice Warner Fee Report (2012), reported in “FEEding frenzy: how much does your super fund cost?” Trish Power – September 12, 2013