Su­per­an­nu­a­tion & in­vest­ment risk

Monthly Chronicle - - Business & Personal Finance - MARK PLASKITT, FI­NAN­CIAL AD­VISER

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.

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