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Super returns in a falling market
Hi all, I saw this info on the FIDO website, as they try to calm people down who have lots stacks on their super. How are others coping, particularly those of you who were planning to retire soon?
Do you need to do anything?
First of all, it is important not to panic about one or two bad years, or make any snap decisions. If you are at the start or in the middle of your working life, you have a long time to keep investing in your super and are well placed to take market ups and downs in your stride. But now is certainly a good time to engage with your super and make sure your fund and investment strategy is right for your retirement savings.
1. How super funds invest for the long term
Super funds are required by law to have risk management strategies and the Australian Prudential Regulation Authority is responsible for making sure that super funds have enough funds to take account of any market ups and downs. Because super is a long term investment, designed to build up over a person’s working life, and the fact that you can't withdraw your super before your preservation age (except in some limited situations), super funds tend to ride out ups and downs in financial markets.
2. Why super is an excellent way of saving for retirement
Tax concessions and other government benefits currently make super an excellent way to invest for your retirement. Contributions from pre-tax income (up to a set limit) are taxed at a special low rate, and depending on your total income, you may get a co-contribution from the Government for contributions you make from post-tax income (again, up to a set limit).
Furthermore, unlike investments outside super, your super fund can invest your money at low rates of tax so your retirement savings may grow more quickly. And, since 1 July 2007, retirement benefits paid from taxed super funds to most people aged 60 or more are completely free of tax.
For these reasons, it’s important not to make any snap decisions to stop or reduce contributions you may be making to your super when times are tough and to stay focussed on the long term horizon.
3. Your fund’s investment performance
No-one can reliably pick which super fund will perform best from year to year. It's far more reliable to pick the right investment strategy and fund features with low fees, and take the ups and downs of investment performance in your stride.
To judge fund performance, always consider returns over the long term (5 years or more). Figures from the last 12 months or less are all but useless in judging performance. FIDO has some examples of average performance of super funds over 5 and 10 years, which you can use to compare to the performance of your fund over the same time. Another important tip is to make sure you compare like with like, ie only compare returns for balanced options with other balanced options.
If your super fund has consistently reported worse than average results over a 5-year period or more, you might want to consider changing to a different fund – still, it is important to remember that past performance is not necessarily any indication of future performance. More about switching funds
4. Keep an eye on your fees
Super is a great way to save over the long term because of the effect of compound returns. That is, your super fund invests your super and reinvests the returns, so you get returns on your returns – they compound. It’s one of the basic building blocks for saving money, investing, and building a retirement nest egg. Over the long term, paying high fees on your super is like compound interest in reverse, that is, the bite grows a little bit bigger each year as your super balance grows.
Every dollar you pay in fees eats into the size of your retirement nest egg. If you pay an extra 1% each year in fees, you could lose up to 19% from your retirement benefit over 40 years. (Calculated using FIDO’s Super calculator assuming an opening balance of $0, a salary of $50,000, $78 annual insurance costs and investment earnings of 8.5%pa. If management fees are 0.55% each year your super accumulation is $350,000 in 40 years, compared with $285,000 if fees are 1.55% each year).
5. Reviewing your investment strategy
Your investment strategy tells you how the money in your super fund is invested, the returns the fund is aiming for and the risks involved. Typically, investment strategies, also known as investment options, fall into one of these 4 groups: growth, balanced, capital stable and capital guaranteed.
Every person's situation is different and the right investment strategy for you will depend on how much risk you’re comfortable with and how long you’re investing for. Your fund's product disclosure statement will tell you about your fund's specific investment strategies.
Because super is a long-term investment, it usually suits a 'growth' or 'balanced' strategy, investing in shares and property. Historically, over any 20 year period a ‘growth’ or ‘balanced’ strategy has been the only way to keep up with rising living standards. But when markets fall, so will returns for funds invested in these strategies.
Volatile times can be a good time to review your investment strategy but with markets bouncing around, don't let short term ups and downs cloud your long-term horizon.
6. Take care before you rush into switching funds or strategies
Switching super funds is a big decision, and there are some important things to think about, like any benefits you have with your current fund that you might lose, or any costs you might have to pay with a new fund. More about switching funds
Take care before you rush into switching funds or investment strategies because you may be turning a paper loss into a real loss as you close your account and put your savings into another fund or investment strategy. You could end up losing on both the swing and the roundabout. Take your time and consider if you should get professional financial advice.
Andrew got a shock when he opened his annual member statement to see his fund was reporting an investment loss from his balanced investment strategy. Five years out from retiring, Andrew was worried about his savings going backwards. Andrew contacted his fund decided to get financial advice about what he should do. Andrew was worried about rushing his decision only to be worse off than if he'd done nothing at all.
More about getting ready for retirement
Use FIDO's Super calculator to model different investment strategies, fees and charges
7. Learn about your super
Learn as much as you can about your super by getting a copy of Super decisions. If you are approaching retirement and are worried about your super nest egg in volatile times, you may want to get professional financial advice. For help finding a professional adviser get a copy of Getting advice.
8. Close to retirement?
If you are close to retirement or you are considering retiring in the near future, then this information still applies to you, particularly the important message not to panic. There are different ways of using some or all of your super savings once you retire or reach your preservation age, so it's worthwhile getting professional financial advice to go through your options and choose the best one for you. New Government rules also mean you can keep your savings in the super system indefinitely, so you don’t need to make a hasty decision.
That said, as you get closer to retirement, you might need to think more carefully about which investment strategy you choose for your super savings. For instance, a lower-risk, lower-return strategy (such as ‘capital stable’ or 'capital guaranteed’) could suit someone thinking about withdrawing all their super as a lump sum within a couple of years who wants certainty about their final retirement benefits.
Market ups and downs, or a negative return on your super in one year don't necessarily spell financial disaster for your overall savings.
Do you need to do anything?
First of all, it is important not to panic about one or two bad years, or make any snap decisions. If you are at the start or in the middle of your working life, you have a long time to keep investing in your super and are well placed to take market ups and downs in your stride. But now is certainly a good time to engage with your super and make sure your fund and investment strategy is right for your retirement savings.
1. How super funds invest for the long term
Super funds are required by law to have risk management strategies and the Australian Prudential Regulation Authority is responsible for making sure that super funds have enough funds to take account of any market ups and downs. Because super is a long term investment, designed to build up over a person’s working life, and the fact that you can't withdraw your super before your preservation age (except in some limited situations), super funds tend to ride out ups and downs in financial markets.
2. Why super is an excellent way of saving for retirement
Tax concessions and other government benefits currently make super an excellent way to invest for your retirement. Contributions from pre-tax income (up to a set limit) are taxed at a special low rate, and depending on your total income, you may get a co-contribution from the Government for contributions you make from post-tax income (again, up to a set limit).
Furthermore, unlike investments outside super, your super fund can invest your money at low rates of tax so your retirement savings may grow more quickly. And, since 1 July 2007, retirement benefits paid from taxed super funds to most people aged 60 or more are completely free of tax.
For these reasons, it’s important not to make any snap decisions to stop or reduce contributions you may be making to your super when times are tough and to stay focussed on the long term horizon.
3. Your fund’s investment performance
No-one can reliably pick which super fund will perform best from year to year. It's far more reliable to pick the right investment strategy and fund features with low fees, and take the ups and downs of investment performance in your stride.
To judge fund performance, always consider returns over the long term (5 years or more). Figures from the last 12 months or less are all but useless in judging performance. FIDO has some examples of average performance of super funds over 5 and 10 years, which you can use to compare to the performance of your fund over the same time. Another important tip is to make sure you compare like with like, ie only compare returns for balanced options with other balanced options.
If your super fund has consistently reported worse than average results over a 5-year period or more, you might want to consider changing to a different fund – still, it is important to remember that past performance is not necessarily any indication of future performance. More about switching funds
4. Keep an eye on your fees
Super is a great way to save over the long term because of the effect of compound returns. That is, your super fund invests your super and reinvests the returns, so you get returns on your returns – they compound. It’s one of the basic building blocks for saving money, investing, and building a retirement nest egg. Over the long term, paying high fees on your super is like compound interest in reverse, that is, the bite grows a little bit bigger each year as your super balance grows.
Every dollar you pay in fees eats into the size of your retirement nest egg. If you pay an extra 1% each year in fees, you could lose up to 19% from your retirement benefit over 40 years. (Calculated using FIDO’s Super calculator assuming an opening balance of $0, a salary of $50,000, $78 annual insurance costs and investment earnings of 8.5%pa. If management fees are 0.55% each year your super accumulation is $350,000 in 40 years, compared with $285,000 if fees are 1.55% each year).
5. Reviewing your investment strategy
Your investment strategy tells you how the money in your super fund is invested, the returns the fund is aiming for and the risks involved. Typically, investment strategies, also known as investment options, fall into one of these 4 groups: growth, balanced, capital stable and capital guaranteed.
Every person's situation is different and the right investment strategy for you will depend on how much risk you’re comfortable with and how long you’re investing for. Your fund's product disclosure statement will tell you about your fund's specific investment strategies.
Because super is a long-term investment, it usually suits a 'growth' or 'balanced' strategy, investing in shares and property. Historically, over any 20 year period a ‘growth’ or ‘balanced’ strategy has been the only way to keep up with rising living standards. But when markets fall, so will returns for funds invested in these strategies.
Volatile times can be a good time to review your investment strategy but with markets bouncing around, don't let short term ups and downs cloud your long-term horizon.
6. Take care before you rush into switching funds or strategies
Switching super funds is a big decision, and there are some important things to think about, like any benefits you have with your current fund that you might lose, or any costs you might have to pay with a new fund. More about switching funds
Take care before you rush into switching funds or investment strategies because you may be turning a paper loss into a real loss as you close your account and put your savings into another fund or investment strategy. You could end up losing on both the swing and the roundabout. Take your time and consider if you should get professional financial advice.
Andrew got a shock when he opened his annual member statement to see his fund was reporting an investment loss from his balanced investment strategy. Five years out from retiring, Andrew was worried about his savings going backwards. Andrew contacted his fund decided to get financial advice about what he should do. Andrew was worried about rushing his decision only to be worse off than if he'd done nothing at all.
More about getting ready for retirement
Use FIDO's Super calculator to model different investment strategies, fees and charges
7. Learn about your super
Learn as much as you can about your super by getting a copy of Super decisions. If you are approaching retirement and are worried about your super nest egg in volatile times, you may want to get professional financial advice. For help finding a professional adviser get a copy of Getting advice.
8. Close to retirement?
If you are close to retirement or you are considering retiring in the near future, then this information still applies to you, particularly the important message not to panic. There are different ways of using some or all of your super savings once you retire or reach your preservation age, so it's worthwhile getting professional financial advice to go through your options and choose the best one for you. New Government rules also mean you can keep your savings in the super system indefinitely, so you don’t need to make a hasty decision.
That said, as you get closer to retirement, you might need to think more carefully about which investment strategy you choose for your super savings. For instance, a lower-risk, lower-return strategy (such as ‘capital stable’ or 'capital guaranteed’) could suit someone thinking about withdrawing all their super as a lump sum within a couple of years who wants certainty about their final retirement benefits.
Market ups and downs, or a negative return on your super in one year don't necessarily spell financial disaster for your overall savings.
Views: 20
Replies to This Discussion
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Permalink Reply by Scott Keefer on -
Great post Pete. I really rate highly FIDO's website.
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Permalink Reply by bvbfan on -
Unless your retiring in the next few years (1-3) dollar cost averaging into superannuation wouldn't be a bad strategy.
I'll be adding to some positions in my super fund which will bounce back. I also have 30+years to go before I can access it.
Most of my fund losses is actually in the months after June 30, I was up until that point but the resource correction has dented a few positions by 25-50%.
Changing now, towards the bottom of the market would be the worst decision. You'll probably decide to switch back in at somewhere near the top of the market next time.
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Permalink Reply by Kbot on -
Too true bvbfan - trying to pick the bottom with any investment is crazy, but even more so with your super. I also don't have to stress to much about super returns right now because it's a while off, but I wonder how those who were planning to retire this year are coping...
I suppose those on the verge of retiring have had stellar returns over the past 10-15 years, so they probably have far more than they imagined!
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Permalink Reply by Vonny on -
i have 30+ years to go till i can access my super too bvbfan. It's great you are contributing to it so early!
I am avoiding putting money into super just yet. I figure you never know where the laws are headed in the future and I really want to buy a property first before I start contributing to super. Do you have any problems like that bvbfan? i.e. wanting to access the money now, as opposed to locking it into super?
The main worry I have is the locking away of the money. It's a 30 yr term deposit that u can't take money out of with tax breaks!
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Permalink Reply by Zed Berlin on -
It's true about the laws for super changing, but as far as I know they don't make things retrospective - i.e. the rules that applied when you put your money into super will still apply to that amount no matter what changes are made. This is why there are heaps of different rules for super...certainly keeps financial planners in business!
Can anyone confirm that this is the case...I'm not 100% on this.
Zed
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Permalink Reply by Joanna on -
Generally I wouldn't worry too much about changing super laws - as the Government intends us to use this money for our retirement and that will never change. The worst case senario that I can see at this point is that they will turn your super payment in retirement into a pension (you get a set amount every week) whereas right now you can take it as a lump sum and spend it all at once.
I still have over 30 years left until retirement, and I understand why people may not want to contribute to super at such a young age. But there are a few things to consider
1. Every $1 you put in now will be worth a lot more when you retire than if you put a $1 in when you are 40 or 50 (because that dollar will earn compound investment returns for several decades rather than just a few years). So while it may seem like a good idea not to put money in until later, you will need to put in a lot more to end up with the same retirement savings
2. The reason you may choose to contribute to super when you are younger rather than build investments outside of super is because your super savings are taxed at 15%, whereas investments outside super are taxed at your marginal tax rate. This means the same investment return in super will generally mean more money for you (if your tax rate is over 15%). But of course this needs to be balanced with the need to buy a home or access your investments before age 65.
3. By salary sacrifcing into super you can still take home the same amount of money after tax (so it won't stop you investing outside of super while still building your retirement savings) - get some financial advice about this!
4 If you earn less than $60,000 a year you should consider making some after-tax contributions (as opposed to salary sacrifice contributions) to super, as the government will match your contribution by 150%. That is a pretty good return on your money - and it's guaranteed! Your super fund will have more information about this.
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Permalink Reply by Matthew Reader on -
These are very wise words. If we all were to take heed of these four points, we'd be far better off come retirement. Lots of younger people think that they don't need to worry about it now, and that they're better off using the money now, for investing, buying a house, etc. But the reality is that if you don't put it into super, you're likely to just spend it.
And Joanna's right - the government isn't likely to change laws to discourage people from putting their money into super, as that means the burden will fall back on them.
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Permalink Reply by Bandwidth on -
I feel the biggest change any govt will make is to use the "retirement age" as a way of maintaining the work force. They can use the eligible age to either encourage people to either leave or stay in the work force.
At the moment there is an aging population issue so the super rules are set to keep people in the workforce. Should that change, over time, the rules can be tweeked to encourage older people out of the workfroce.
Also the Govt will develop the rules to keep the capital in the marketplace while the income can be drawn down.
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Permalink Reply by moonbuggy on -
I think you're spot on here Bandwidth - the retirement age is likely to be stretched somewhat to keep people in the workforce.
Don't think the balance is going to shift towards them wanting to keep people out of the workforce for some time, short of a clone army of workers or a massive immigration push!
Besides, older workers have learnt so many skills that it's a waste to have them retire and stop contributing to society in a productive manner. And no, golf is not productive! ;)
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Permalink Reply by Bandwidth on
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Hello Moonbuggy
We will see what happens when the currently growing baby boom starts to fuel the workforce.
A lot of the "retiring' baby boomers move to areas outside the mainstream, avoid the stresses of corporate life. They then do voluntary work, mentoring, alternative lifestyle etc.
Commonly called SKINS
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Permalink Reply by Vonny on
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1. agree with that but i do that outside of my super fund anyway so it really is the same as if the funds compound outside of super
2. tax - this is probably the biggest reason i find to contribute to super
3. i haven't quite got my head around salary sacrifice to end up with the same amount after tax yet. will need to do more research on this to see how i can manage to do this. last time i had a look at this i thought i found that it was the same amount after tax if u include the extra that is in your super. But that still means i have less cash in my own pocket. I'll double check this in case I calculated incorrectly.
4. doesn't apply to me
There's still the locking away funds problem. I think if the funds weren't locked away, i'd be more inclined to contribute more earlier because i know that say if i ever need to make a large purchase like for property, then i can access the non-compulsory part of my funds - similar to paying off a mortgage where u can redraw if u put in extra.
In the US i know u can redraw funds for certain reasons but I don't believe this is so good for those that are less financially disciplined.
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Permalink Reply by Vonny on
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ok i did a bit more research for point 3. i can only find evidence (via googling) that transition-to-retirement can provide u with the same take home pay via salary sacrifice but plain old salary sacrifice cannot do this.
If anyone knows otherwise, can you enlighten me please?
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