Make more of your super options
When it comes to super, Australians are spoiled for choice. Without even changing funds, most of us can choose between dozens of investment options —from conservative cash investments to high-powered sector specialists, and everything in between.
Yet surprisingly few investors take advantage of all that choice on offer. According to the Australian Prudential Regulation Authority (APRA), more than 42% of assets held by super funds with more than four members are simply sitting in the fund’s default option, despite the fact that the average retail super fund offers an astonishing 255 alternatives.[1]
And even if you are one of the savvy few who have carefully selected the investment option to suit you, it’s worth rethinking your strategy every few years. That’s because your needs change as you approach retirement and your investment timeframe shortens.
Fine-tuning your strategy
Achieving the right mix isn’t always straightforward. On the one hand, as retirement comes closer, preserving your current super can be just as important as earning more. So, with less time to ride out the ups and downs of volatile markets, it can make sense to start switching at least some of your investment to lower risk options.
Yet, with Australians living longer and spending longer in retirement, so it’s also important to avoid the risk of outliving your retirement savings. As a result, many investors choose to keep at least some growth assets in their investment mix.
Here’s a simplified example to show how just a little extra growth can make a big difference over time. It’s been calculated with MLC’s Superannuation Calculator[2] available at http://www.mlc.com.au/SuperannuationCalculator/
Let’s say a 55 year old is earning $70,000 a year and has $150,000 in super. Assuming their super fund returns 5% pa a year, they could expect to retire at 65 with around $235,376 in savings. However, by switching to an investment option with more growth assets, and accepting a bit more risk, the return they can expect increases. If it increased to 6% pa, just 1% pa more on average, they could finish with a balance of $256,008 — around $20,632 or 9% more.
Of course, in the real world, investment returns are rarely so predictable. In particular, there may be times where higher growth options yield disappointing results, sometimes for several years running.
Getting the right mix
So choosing the right super option is all about achieving the optimal balance between risk and return for your individual situation. By diversifying your portfolio across asset classes, you can take advantage of the growth potential of more volatile investments, while still keeping risk at a manageable level.
A financial planner can help you explore the options, starting with a detailed understanding of:
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Your retirement savings target, and the returns you need to get there.
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Your investment timeframe until you retire.
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Your personal attitude to risk (including volatility of your investment value and the risk of outliving your retirement savings).
After all, everyone’s situation is different — so you need to have a retirement plan that’s as individual as you are.
[1] APRA, Annual Superannuation Bulletin, June 2011 (issued 29 February 2012).
[2]See the website for detailed assumptions. We recommend you seek financial advice before taking any action.