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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: 31
Replies to This Discussion
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Permalink Reply by Mike Robinson on -
You're right Vonny. TTR is the only way to do it. But TTR has age limits, so you can't use TTR until you're close to retirement age. You certainly can't use TTR if you have 30 years to go to retirement.
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Permalink Reply by bvbfan on -
Actually I'm off the belief that super will be promoted more and if the ALP is still there will see higher forced contributions and perhaps a lower tax rate for contributions and earnings.
(I say ALP since the Liberals cut the contributions rate that Keating had mandated to increase to 15% now when the Libs won the 1996 election)
I believe it will be cheaper for the government to implement this than to have the Age Pension in 15-20years time.
I'm also in the position of buying a house but to me I'd prefer to just be paying interest only as long as I can and putting extra into superannuation.
I think I can get 7-8% from super over the long run and I think home loan rates will be lower than 7% over the long run. (20-30years)
I guess it's personal views on what is best, for me I think doing interest only is far better than doing principle and interest on the home loan.
On the salary sacrifice issue, I don't think its possible to get the same take home pay while salary sacrificing except when you in the bracket where you can draw from your super to supplement your income. Stand to be corrected on this.
The real benefit of salary sacrificing as I see it is to divert excess savings to a more favourable tax environment for use later in retirement.
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Permalink Reply by Vonny on -
That's an interesting strategy to forgo the house payments for super.
I don't know which way is better, will have to run a few numbers to figure that one out. The main problem I can think of there is that you build super up slowly with your hard earned money while with a housing loan, you are paying <7% on the money you don't have straight away. So as an example you could be paying <7% on $300-500k while you put in say $30k(?) in your super every year so the compounding is on a smaller amount in your super until it catches up in value to your mortgage. Also, interest only loans are for a limited time, 1-5 years, and after that you need to pay off the property. Will you sell after 1-5 years?
On 500k, putting in 30k each year and compounding 7-8% every year, your super will take about 10 years to get to 500k.
On 300k it will take about 7 years.
In the meantime your property would go up in value, however, if you sell up and buy elsewhere, that value isn't gained. Likely, i'd imagine you'd be upsizing due to your age.
On the upside though, the advantage is that you get taxed alot less and you start compounding super earlier.
Let me know what you think about all this. If these problems are solved maybe i'll give it a go ;)
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