The events of the last few months have emphasised to me the importance of financial education.
It started with the argument about the government changing superannuation tax rates. And in the past few weeks I’ve written about how women fare under the superannuation system. I’ve been amazed at the feedback.
Given the correspondence I’ve received, I am convinced of the need to educate Australians about investment strategies for retirement.
One of the strongest arguments for this is the advent of ‘defined contribution’ superannuation. Back in the day we had ‘defined benefit’ super schemes, where you were guaranteed income for life based on how many years you worked for an employer. But in 1992 that changed, and now you’re guaranteed a percentage of your wages paid into super, where it’s invested in shares, property, bonds and cash.
So you are responsible for building your superannuation into a lump sum that pays you income in retirement. But simply having contributions put into your super doesn’t mean you understand how the system works or what is expected of you. And that’s the big issue.
So along with contributing super for employees, we should be teaching people how to optimise their retirement investments. After all, two people can put the same amount into super all their lives and one can end up with substantially more savings than the other.
It comes down to details that not everyone understands: what are the options? What is a risk-reward trade off? What does volatility mean? Why are voluntary contributions so important? What is the income replacement ratio and why does it matter?
Paul Keating introduced compulsory super and subsequent governments have supported it. Governments can’t be responsible for everything, but it is their job to ensure the system works, which requires a basic level of understanding.
While it’s easy to say that financial literacy should be taught in schools, we in the financial services industry have a responsibility to ensure that people understand their super. And the first thing we can do is remove some of the jargon. A universal system should use universal language.
Employers are also in a position to talk about retirement investing and perhaps organise events such as lunchtime investment seminars. Unions could do more: they run some large super funds and that gives them access.
Finally, the debate about super is too often tax-based. It would be constructive to remind people that superannuation is actually a tax arrangement, designed to increase returns and to encourage members to put more in.
The bottom line is that education, like superannuation, is best started early. Read this from one of my Twitter followers this week: “36 years hairdressing, virtually no super. It’s been an important topic for my 2 daughters who are in there early 20’s. I had already implemented some of your ideas, the girls super is on 15%. Want to secure their future.”
Like the mother above, we must learn from our mistakes and ensure our children don’t repeat them. The first step is education.
Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance. This article first appeared on Property Observer.
