First home super saver scheme – pro tip
I’ve written in the past of the benefits of the stupidly overly complicated First Home Super Saver Scheme and it seems to be gaining popularity.
I’ve also written in the past how to invest (or not invest) your home deposit and largely see these principles of investing conservatively (or holding in savings account) applied.
Unfortunately however I often see the two principles not applied together and people utilising the First Home Super Saver Scheme (FHSSS) just invest with their normal super balance which generally hols predominately growth assets that have risk, especially over the short-time.
So what should I do?
Most people I find plan to have enough saved for their first home in the next few years or so and unfortunately to aim for a higher return on your savings you need to take on a higher level of risk and the main risk is that the funds will go down if the share market does (and no one really knows what it will do). So a cash or less risky fixed interest investment is probably more appropriate over this time frame.
These options fortunately are available in super too so you can invest your additional contributions in these options. You can do this by altering your investment allocation within your current fund or you can invest in a similar option in a new fund. In a lot of cases the latter is tidier but make sure you do so in a fund that has no fixed $ admin fee (they exist) and only a % fee as otherwise the fixed fee will work out as a largish % on the smallish balance.
But I won’t get as high of a return?
The Government currently allows you to withdraw an additional 3.98% on the contributions which is a better return than on a savings accounts outside of super or cash options inside super and this is attractive to people but stress the main benefits of the scheme are in the tax savings.
I stress that although this is the return the Government allows you to withdraw, it’s not your actual earnings and if your earnings are less and you withdraw the maximum you’ve effectively stolen from your retirement savings (AKA your future self!). On the otherwise if market returns are higher you benefit your future self by investing more aggressively.
Cash options within super would expect to return near 2% and fixed interest 3 or 4% which is pretty close to the 3.98% so investing your home deposit inside super as you probably would outside of super is unlikely to make any material difference if just over a few years vs the tax benefits.
Don’t believe me?
Few people do so I find (as I often do) I need to refer to a spreadsheet to win my argument for me.
The usual response is “yeah I get it but the difference is likely to be small and I’m prepared to take my chances and improve my personal situation now by having a larger deposit and accept I might have a slightly smaller super balance in retirement.”
The problem is it may not be small…
Let’s assume this scheme was available before the market crash (GFC) back in 2008 (or we’re near a crash now, who knows) and you took full advantage of it.
If you had $9,049.73 in your super account to start with (amount you will lose based on the actual returns), invested in AustralianSuper High Growth (random, popular option), maximised your contributions and then withdrew the maximum after two horrible investment years you will have no balance left and have lost the $9,049.73 and then there’s of course no balance to earn returns.
If you had instead invested in the conservative cash option for the first couple of years before returning to the High Growth option and achieved the actual returns illustrated until now and 8% from now on (assumption) you will have $115,522.10 more in retirement (say 30 years after you started the scheme).
Hardly a small difference and yet another advertisement for compound interest/returns.