One common question in regards to the establishment of an SMSF is ‘how much do we need to start one?’
The answer is simple: It depends!
If you read the information out there regarding this subject, you will find that the recommended minimum amount required for establishing a SMSF is $200,000. This figure is based on one thing – the cost of operating an SMSF when compared to the management and administration fees charged by retail and industry superannuation funds.
Sounds good in theory. On average a retail superannuation fund will charge 1.37% of your balance in administration and investment management costs – so if you have a $200,000 in a SMSF, your annual accounts, audit and administration fees are expected to be $2,740 – which is pretty reasonable.
However, this theory has a major flaw. A SMSF is nothing like an industry or retail superannuation fund. A SMSF gives you total control and freedom of choice regarding your investments, offers flexibility and you are able to utilise advanced wealth building strategies that are simply not available to the average industry or retail super fund member.
Comparing the operating cost of an SMSF to an industry or retail super fund is like comparing the cost of servicing a Porsche to the cost of servicing a 2004 Toyota Camry. A SMSF should cost you more per annum when compared to other types of super funds – this is the premium you pay for having a superior vehicle to build your wealth.
That said there is no reason to unnecessarily pay exorbitant amounts in administration costs. The more you can save when you first start your fund, the more you will have to invest!
Another consideration when determining how much is enough to start an SMSF is the ability to diversify. Diversification is basically the splitting up of your investment monies over different asset ‘classes’ such as cash, Australian Shares, International Shares, Fixed Interest, Property etc.
The more money you have to invest, the easier it is to spread your monies over the different asset classes and in theory your returns will be more stable and consistent in terms of income and capital growth.
With a smaller amount of funds, you may be able to achieve diversification through investing via a managed fund; however this simply adds another layer of fees – meaning you may as well have left your money in an industry or retail fund. This brings me to my next point – quality.
The quality of your investments is the key. Someone who investments $100,000 in high quality investments under a well considered and consistent investment strategy over the long run is going to better than someone who investments more money in poor quality investments or who chops and changes their investment strategy every year or so.
Through my employment as a Chartered Accountant, I have seen hundreds of sets of SMSF accounts. All the SMSFs that have performed well over a long period of time have one thing in common – they have high quality investments and they stick with them.
OK – so how does this answer the question of how much is required to start up an SMSF?
Firstly you need to ask yourself if you are planning to buy high quality investments or are you just going to jump on the bandwagon of the person promoting the latest investment scheme and throw your superannuation savings at it?
Secondly you need to know how much you need to invest to obtain those high quality investments. For example if you are going to buy a cash flow positive property using an SMSF loan, how much do you need to cover a large enough deposit and the associated purchase and set up costs?
Thirdly you need to know how much it is going to cost you per year to run your fund. Be realistic, work out how much as a percentage of your total superannuation savings will be eaten up every year, and if this percentage is acceptable to you in regards to what you are getting into return then you should be able to make your decision.
Once you can answer the above three questions you will have a really good idea of exactly how much you will need to be able to commence your own SMSF and take control of your retirement savings and wealth creation.