One thing 2020 proved is how unpredictable life can be. Sudden market changes highlighted the importance of assessing how your retirement funds are invested – and seeking financial advice if you’re not comfortable making such investment decisions alone. This is because, for people closer to retirement, sudden market moves can have a significant impact on their plans for life after work.
Getting your retirement plan right, including how you plan to draw down on your super fund to cover the costs of retirement, really can make the difference between a future of financial stress or one where you are secure in your savings.
As such, planning for retirement should be an ongoing process that changes with your situation. And by understanding your exposure to equities, including exposure through your super fund, you can make sure you’re making the right choice for your situation.
Whether retirement is nearing for you, or perhaps a decade away, it’s wise to ask yourself: does my current super fund investment choice, and its resulting income, support my desired retirement lifestyle? And how much risk is the right amount in terms of level of exposure to equities within my super fund in order to achieve that lifestyle?
How well do you know your default option?
A default super fund is also known as an employer-nominated super fund. This is created for an employee when you commence work with a new employer and you have not nominated your own super fund. Federal legislation requires all employers to make super guarantee payments on behalf of eligible employees.
So, if you don’t have a preferred super fund, your employer will create a super fund on your behalf. The contributions your employer makes will be invested in the default option within the fund, which is commonly known as the balanced fund.
Despite its name, the level of exposure to equities in a balanced investment option will vary significantly between superannuation providers, with the proportion of the fund invested in shares being anywhere between 50 per cent and 85 per cent.
Many of my clients are quite shocked when I explain the level of share exposure they have within their superannuation, because they were under the impression the super fund provided to them by their employer was ‘safe’ in the sense that it was not exposed to equities.
Remember to question the headline numbers
We see many evaluations online that compare one balanced fund against another. Funds often make claims about what they can offer and achieve, without revealing how much risk is taken for this outcome. For example, a fund might claim they have achieved an average of 10 per cent return over the past 10 years.
While this might be factually correct, it doesn’t reveal the level of risk. It’s not a fair comparison if one balanced fund has an 85 per cent exposure to equities while another balanced fund only has 50 per cent exposure to equities. Why? Because the second fund may only able to achieve an average return of 7 per cent over the same period but is potentially a safer option.
If you’re concerned about the assets you’ve invested in through super, it can be useful to assess your appetite for investment risk. This will vary with investment timeframe, investment experience, age and expected returns. What may be okay for one person may be unsuitable for another.
Your attitude to investment risk can also change over time. Someone in their 30s or 40s may be comfortable with a high level of exposure to equities as they have time on their side. At a younger age you have more time to recover from a downturn in the market, whereas someone approaching retirement may want a much lower level of risk to protect their retirement nest egg.
Following the Global Financial Crisis in 2008, for example, many investors said that they had been ready to retire but weren’t able to because their super fund had lost so much money. They then felt that they needed to either continue working to allow the super fund to recover, or retire and adjust their lifestyle in retirement.
It’s important to assess how much exposure you have within your super proactively and not reactively (i.e. after a major event such as the GFC), though. If you’re not confident about how to do this, a qualified financial adviser can assess how much risk is right for you and then assess the level of exposure to equities within your superannuation fund. This can then be adjusted so it is invested in line with your attitude as closely as possible.
Consider how much equity exposure you need
With interest rates at record lows and indications from the Reserve Bank of Australia that we are likely to be in a low cash rate environment for some time, it’s important to consider some exposure to equities in retirement for the long term.
Retirement can be a 20-25 year timeframe or possibly even longer for some. It can be important to consider whether your investment portfolio, including your super, will continue to provide you with some investment growth so that its returns at least beat inflation.
If we look at the rates being offered on cash and fixed interest products today and their expected outlook, many retirees can’t afford to have only safer investments in their portfolio. To calculate how much exposure to equities is needed will depend on how much you need to fund your retirement and the level of risk you are comfortable taking on. And that’s a decision only you can make.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.
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Article by Zac Ayoubi on May 3, 2021 at startsat60.com