23rd Jul 2014
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Super fund risk versus reward
Author: YourLifeChoices
Super fund risk versus reward

Superannuation is an incredibly useful way of saving for your retirement – but how do you know if you’re in the right fund? Jeff Bresnahan of SuperRatings helps you to navigate through the complexities of superannuation.

Q. I am 59 and thinking of retiring in the next few years. I realise I can (currently) access my super (tax-free) at age 60, but think this might be premature, as I only have about $250,000 saved. It occurs to me that it may be smarter to work a little longer, pay more into super and move my funds from the extremely conservative portfolio to one with a little more risk, but higher returns. So I am wondering what the up and downsides of this action might be – i.e. how do I weigh up super fund risk versus return as I approach my retirement?

A. The general consensus is that it is in your best interests to work for as long as possible in order to maximise contributions to super and grow your account balance to as high a figure as possible. With people generally living much longer, individuals who are nearing age 60 are likely to be invested for another 20 or 30 years and so should retain a superannuation or pension balance. With the recent increase to $35,000 per annum in the concessional contribution caps for individuals over the age of 59 at 30 June 2013, a great opportunity exists for individuals to maximise their contributions to superannuation, whilst potentially reducing the income tax they will pay on their salary (via what is known as a salary sacrifice arrangement). With this in mind, were you to be able to work for another five years, you could contribute up to an additional $175,000 into your super account which, with reasonable investment returns, could result in you doubling your super balance over that time.

In terms of increasing the risk of your super investment, given the long timeframe you are likely to be invested for when you do retire, there is no need to adopt an extremely conservative portfolio. You must remember though, that any increase in the risk profile of your investments will also lead to a greater potential to lose money, where investment markets fall. To maintain some capital protection whilst trying to maximise investment returns, many retirees use a Capital Stable or Conservative Balanced portfolio in which to invest their pension assets. These portfolios tend to use an allocation of between 30 per cent and 50 per cent to growth assets (Australian shares, international shares and property) while also investing between 50 per cent and 70 per cent in defensive assets (fixed interest and cash). Where your portfolio is invested in something more conservative than this, you may wish to consider changing this allocation, provided you are comfortable with the additional risk you are taking on.

In saying this, you should also take into account that investment markets have provided historically high returns in recent years. The SuperRatings Pension Capital Stable Index shows that the average superannuation fund returned 9.1 per cent for the year ending 30 June 2013 and has also returned an average of 7.9 per cent over the 11 months to 31 May 2014 (refer to SuperRatings’ SuperSavvy website at www.supersavvy.com.au for more information on investment returns), resulting in some analysts suggesting a correction may be coming. Whilst it is nearly impossible to time investment markets, it may be best to phase in over a period of time any increase in your investment in higher risk assets, rather than doing it all at once.

Read SuperRatings disclaimer.





    COMMENTS

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    Polly Esther
    28th Jul 2014
    10:57am
    How do you know if you're in the right fund? Very good question. Unfortunately the answers a lemon. The only time you'll find out is when the time comes. Similarly the same question can be asked of insurance companies, the only time you know if you have the right insurance policy with the right company is when you make a claim. You can only do what you think is best and keep your fingers crossed. It's like life, it's a bit of a gamble really.
    41Alpha
    28th Jul 2014
    6:13pm
    I'm much in the same dilemma, I turn 65 in about 6 weeks time, so have to get my act together pretty quickly. Although I will probably continue to work part time for another year or so.
    I have been pretty skeptical about Super Funds after taking a big knock in 2008/9 as a result of the GFC. I basically moved all of my Super from Balanced to Cash and didn't give it another thought until recently.

    I currently have about $250K in Super and about $200K in bank term deposits. I'm currently getting about 3.5% interest on the term deposits ( of which I unfortunately have to pay tax on) I was thinking of moving most of my term deposits ( Bank) and most of my Super into Balanced investments, but having done some research, I'm toying with a safer option like about 33% in Term deposits, Defensive and Conservative.
    I might have chosen 100% Balanced if I was younger and would have time to recoup my losses if thing went down hill.
    Adrianus
    29th Jul 2014
    9:20am
    41Alpha, I am in much the same situation. The old rule of thumb was to go more conservative as you near retirement. This strategy usually provided higher income levels and less growth/volatility. In my opinion, this rule is now questionable to some degree with the low cash rate, given that many listed companies are distributing income at higher than 3.5%.
    I have been unimpressed by fund managers and the restricted regulations in which they operate. They just don't do enough to earn their high remuneration.
    Adrianus
    29th Jul 2014
    8:54am
    I think Jeff is spot on with this article. Faced with the above scenario I do agree strongly with the final tip "phase in over a period of time." Depending on the type of Super Fund, and how accurately the Fund Manager times your investment switch, you can move some funds to a more aggressive market sector (ie shares) then in the event of a market drop move more, thereby minimising your short term volatility. This is called "Dollar cost averaging."
    Porthos
    29th Jul 2014
    9:59am
    Given that one can reasonably expect that one might survive another 20 years on retirement I think it is wise to ensure that a proportion of funds are in growth assets. However one should have one's pension drawn from a cash account which has at least a year, preferably 2 years worth of money so that any dips in the share market don't require one to sell shares when they are at a low point. However what one does discover on retirement is that information on pension funds is a lot less than for superannuation funds. So it's difficult to be sure one has made the right choice. Once the choice is made one can be stuck with it for better or for worse because of the rules about eligibility for super contributions.
    41Alpha
    30th Jul 2014
    6:13pm
    It might be a good idea to get onto one of the Super Fund web sites and complete a questioner on 'What sort of investor are you'. I'm with HESTA and after completing the questions, which include your age group etc. it confirmed I was a cautious investor and would be stressed if I lost money for a period of time.
    Adrianus
    30th Jul 2014
    10:33pm
    Risk averse investors who are invested aggressively and exposed to a downturn usually become defensive when they should show some aggression. This is just fear. Nothing to be afraid of.
    MacI
    31st Jul 2014
    7:51am
    Super is merely a low tax vehicle for investment towards retirement. How funds are invested are to a large degree the choice of the investor. Super funds have all sorts of options available to investors from very low risk to very high risk including, e.g from 100% cash to 100% shares and the funds are very clear about the relative risks between the options. There is plenty of information about the historical performance for the various options from the funds and websites such as SuperRatings that allow you to compare funds.

    Rather than blame Super funds for poor performance one needs to engage and put some effort in educating themselves about investing in Super. You don't need to be a financial guru to choose a Super fund that has performed well over time and then choose an investment mix that suits your risk profile. My fund charges low fees and has performed well over time. For example for the very risk averse the 100% cash investment returned 4.3%, 3.9%, and 3.7% for 7, 5, and 3 year investment periods respectively - add approximately 0.7% in the pension phase. The Conservative option, i.e. approximately 70% defensive and 30% growth, returned 5%, 6.9%, 6.6% for 7, 5 ,and 3 year investment periods respectively - add approximately 1% in the pension phase. Note that the 7 year period includes the Global Financial Crisis hence the lower average return but still better than cash without too much extra risk.
    Adrianus
    31st Jul 2014
    9:04am
    I agree KCI, you don't need to be a financial guru to choose a super fund that has performed well over time. However, a strong historical performance over those time frames you mention raises questions too.
    I remember a fund advertising on TV that they had outperformed competing funds with their 3 and 5 year results . The variation was so high that it raised my suspicious curiosity. I will not tell you what I found on an open forum.
    MacI
    1st Aug 2014
    6:33am
    Frank - Yes I am also aware of an industry fund that had gained top ranking based on performance prior to the GFC but crashed to near bottom of the rankings after the GFC. The primary reason was that had invested much too heavily in unlisted property. I was looking around for an industry fund when the fund was performing at its best but there was plenty of public commentary around casting doubt on their investment strategy that pointing to their vulnerability. It pays to do some extra digging beyond the performance.
    Adrianus
    1st Aug 2014
    7:12am
    KCI, your example is another reason why I believe fund managers are over paid. There are a lot of free loaders on top of the Super food chain that are far too passive in my opinion. They should be paid no more than banks.
    If you are looking at property whether it's listed or not, it's a good idea to check the dates of the most recent valuations. That information can be exstrapolated with the market trend in that sector. I know with super funds property needs to be valued regularly but some fund managers may drag out those time frames because it adds cost and can make the performance look bad during a period of declining values.
    Adrianus
    1st Aug 2014
    7:37am
    I should add that not all fund managers are loafers. Many earn their money and are very keen to get solid results. When Kevin Rudd tried to ease concerns about the looming impact of the GFC it was already too late to act and yet there was a scramble to safety. According to Kevin it was something that was happening in the USA and should not concern Australians because our big customer (China) has put in some big orders. We all knew better. The IMF has recently down graded global growth forecasts slightly even in China, down to 7.4%. It all sounds to me like the new cycle is stalling?


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