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.
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