Superannuation & investment risk
Nearly every employed person in Australia will have superannuation, as well as many retirees, and it’s likely that your employer contributes 9.5% of your salary to super.
But how’s that money invested? Many people don’t actually know, even though super will often become a person’s second most valuable asset, usually after the family home, by retirement.
Two of the biggest influencing factors on how much super someone will end up with at retirement are how much is contributed, and how it’s invested.
Many people feel limited in how much extra they can contribute to super, as their current living expenses, plus repaying debts (such as mortgage and credit cards) will often take priority over saving for the future. But how you invest your super can be changed any time if required, without affecting your personal cash flow.
Most super funds have a long menu of investment options, ranging from low-risk (relatively little interest and no capital growth apply, but also little if any risk of losing your capital), through to high risk; over the long-term its dividends and capital growth could be expected to significantly outperform a bank-account, however in the shortterm your capital can go down in value, which many people experienced during the Global Financial Crisis.
Most super funds have a default investment option, so anyone who didn’t choose their own investments for their super, is likely to be invested in their fund’s default option. Most default investment options aim to be “middle of the road” for investment risk, and may suit many people, but it’s worth checking if that is right for you because your super fund doesn’t know your individual circumstances, so it’s hard to imagine that a default fund can suit all their members.
Let’s look at a couple of common examples: The imminent retiree - someone with a mortgage on their family home who wants to retire next year, and stay in their home living off the age pension in retirement, cashing-out some of their super to repay the mortgage at retirement to be debt-free. As they want to withdraw some of their super relatively soon, perhaps that part of their super should be invested in a low-risk investment option, as it’s possible that more aggressive investment options could produce negative returns over the next year. Super funds do tend to produce positive returns more years than they do negative, but many people aiming to retire in 2008 found their reducing super balance actually prevented them from retiring, and sadly we cannot know if the next year will be positive or negative in advance. Forecasters make their best predictions and are frequently wrong.
Mid-life worker: someone with over 20 years left in the workforce, who wants their super to grow as much as possible to reduce the burden of them having to make extra contributions. They may be comfortable to be in their super fund’s higher-risk investment options, which would likely see a significant portion of their super invested in things like blue-chip Australian shares, plus international shares. While such shares may go down in value during an economic downturn, if the shares are from good quality companies then over the 20+ years until the person retires, they could be expected to outperform the default investment option.
So if that person is comfortable with the increased volatility then such a change may result in them retiring earlier, or retiring with more than what the default provides.
So speak to your financial adviser or your super fund about which investment options suit you best.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
Mark Plaskitt is an Authorised Representative GWM Adviser Services Limited ABN 96 002 071 749, MLC Financial Planning an Australian Financial Services Licensee, Registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia group of companies.