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Saturday, 11 November 2006

It's Never Too Early to Plan for Your Retirement

Our most recent addition to the family is now 7 weeks old - plenty old enough to start planning for his retirement ;)

I had a look through the current superannuation (retirement) account offerings on the web, and found one (ING OneAnswer) that seemed to fit all my requirements - low initial amount ($1,000), low regular savings plan additions ($100 per fund) available monthly or quarterly, and a suitable mix of investement options (as the investment has a 65 year time horizon before it gets rolled over into a pension I'm going for high-growth asset mix with some gearing).

It will be a "child superannuation account" (so friends or family can make contributions into the account on my son's behalf), which means the maximum that can be contributed is $1000 per year (actually, it's $3000 every three years per account, and you could set up more than one account if you wanted to contribute more than $1000 per year per child). I made the minimum initial contribution ($1000) via direct debit from my bank account and set up an automatic direct debit from my bank account to contribute another $200 every quarter, starting from next June. This will mean I don't exceed the $3000 cap within the first three years of opening the account.
The asset mix I selected for the initial $1000 is as follows:

Geared Australian Share Fund 30% ($300)
Australian Shares Index Fund 20% ($200)
International Shares Index Fund 20% ($200)
Global Small Company Fund 10% ($100)
Global Emerging Markets Fund 10% ($100)
Property Securities Fund 10% ($100)

The regular savings plan contributions will be split:

Australian Shares Index Fund 50% ($100)
International Shares Index Fund 50% ($100)

At the end of three years this will mean the asset mix only contains around 3% Property and 3% emerging markets, so I'll probably top up the savings plan contributions after year three with an additional $100 into the Property Fund and $100 into Emerging Markets Fund each year to reach the $1000pa contribution cap. I won't bother rebalancing as the buy-sell spread is still an unnecessary cost, even if switching is free. I'll just change the weighting of the savings plan contributions to keep things roughly 50% AU shares, 30% Int shares, 10% Emerging market shares and 10% Property Securities.

The account will automatically come under my son's control when he turns 18 - but as he can't withdraw the funds until he reaches retirement age (60) it will be a good tool to teach him a bit about investment management.

I lodged the application via a financial planner who will rebate 100% of the initial application fee (which is around 4% for the front-load option) as additional units. Hopefully, he will also OK the rebate of the on-going trailing commision (0.6%) - he did this when I set up a child superannuation account for my first son five years ago. [As he has processed several of my other investment applications (on a non-advisory basis) he earns enough trailing commision from me to make it worthwhile processing the odd "freebie".]

The trailing commision rebate will add quite a lot to the account's performance over 60+ years - if it earned 10% pa on average (after fees), the trailing commision rebate would add another 0.6% to this - a boost in performance of 6%! This will basically mean an extra 6% in the final value of my son's retirement account (maybe $20,000 in today's money) - just by processing the initial application in the best possible way.

Of course all this planning is highly speculative - who knows what changes to superannuation rules will be made over the next 60 years. Also, I'm being optimistic and assuming my sons will both be around to enjoy their retirement. Although there will be some benefits to them much earlier on - when they start work they won't have to worry about making extra contributions to their retirement account (probably just the 9% SGL minimum will suffice), so they can concentrate their savings on buying a home etc. Also, having a significant balance in their retirement account will mean they won't need as much life insurance.

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