Compared to an ordinary retail fund, there are two main variables that impact your SMSF returns.
- Expenses
- Investment performance
Both of these factors do require guesswork or estimation to work out what kind of possible SMSF returns you can expect if you don’t have one yet. Of the two, expenses are the easier to understand and research. Investment performance varies greatly among different investment products and is also affected by a wide range of external factors.
Expenses
If you have a service provider that charges a flat fee for annual SMSF administration services, there is a point where your balance is great enough that the fees you incur in SMSF management are lower than what you can get with an ordinary super fund, retail or industry.
A flat fee in your favour increases your returns by lowering the take of your provider as percentage. This holds true whether you have an accountant managing your SMSF or specialist management service such as Jarospace.
The point at which you hit this change for your SMSF depends on the setup and ongoing expenses. Some people quote $100k, $200k or even $250k for starting balances before an SMSF becomes ‘worth it’. People have different set up and service fees in mind when they quote a minimum starting balance.
If you’re interested in hearing about our SMSF services and fees:
Book a consultation with Jarospace today
Also, it is worth clarifying that the balance is of the fund, which is the sum of the rollover contributions of all members. The time to get to a $200k starting balance diminishes quickly when you are planning on having 2 – 3 fund members or more. If you’re comfortable starting with $150k or even $100k, then time to get there is even less.
We feel that is not the full story though, as you may want to consider things like the opportunity costs if you are planning on investing in products that are not available in an ordinary super fund, such as crypto or an investment property.
Additionally, you may want to also think about your likely future SGC or voluntary contributions, and if you want to get further members onboarded into the SMSF. These will both give you an idea about the growth trajectory of your SMSF returns and may help you decide on timing.
If you have a percentage fee based SMSF service provider, then the comparison of expenses is simplified. It’s easy to see the difference in costs between your super fund and the SMSF management provider.
The set up fee also affects the average SMSF returns. You can account for this by dividing the set up fee by the likely number of years your SMSF will be active. This will give you an annualised cost (without accounting for inflation), and you can then convert that to a percentage by comparing with your starting balance.
Investment Performance
The second and most difficult consideration is investment performance, as the ‘self managed’ aspect implies, your investment journey is up to you. With the increased variety of investment products available to SMSFs, it’s certainly possible to outperform retail funds if you have a different investment strategy.
Examples of investment products available to SMSFs that you can’t get with an ordinary fund are many. There are growth asset classes like residential property or crypto, where returns on these investments over a long period of time may differ significantly from ordinary retail fund performance.
There are also more granular ways of investing that affect your SMSF returns, such as an industry or market specific index funds, or shares in individual entities.
If you don’t want to choose and manage your own investments, then it’s possible to engage an accountant or investment manager to do this for your SMSF. This requires great trust though, and you’re also opting out of one of the main benefits of control (check out our other blog on this).
If it’s possible to get improved investment performance with SMSFs, then the reverse is obviously true too. Assuming that there is only upside is risky and mostly likely not realistic. The outlook for retirement based investment is usually large, and conservative approaches are the most common, and definitely worth careful consideration. The reason for being conservative for retirement investing is due to the diminished ability to generate active income at the age of retirement. Basically, if your investments go south, you have very little ability to earn your way out of it if you’re retired and also have a low balance.
If you are part of the cohort that meets or exceeds the performance of retail fund investments, then benefits of your SMSF returns may offset higher administration costs while your balance is low, and you could be better off overall. Whether this is something you want to take on is up to you, remember that your retirement investing is important though and take due consideration of the risks.
Conclusions
If you individually, or with your family and friends collectively, have a high super balance, then SMSF returns may be better for you even with an investment strategy similar to that of ordinary retail super funds due to lower fees alone.
If with your SMSF, your investment strategy is different, or your investment products are different compared to an ordinary retail super fund, then the SMSF returns will most likely be different, but whether they are better or worse depends on the decisions you make.
CONTACT US
You can also write to us at
info@jarospace.com
Or call us on 0489 074 123
Business hours
9 am – 5 pm
Monday – Friday
We will respond to your enquiry
within 2 business days.
