If retirement was on your horizon in the next five years or so, the market downturn due to COVID-19 coronavirus might have prompted you to take a closer look at your superannuation and how it’s invested. Perhaps you’ve seen your balance drop and are now wondering what you need to do to get your retirement back on track?
In this article, we explain, generally, what super funds do with retirement savings, the different types of investment options to choose from, stage of life considerations, and the implications of changing investments.
Generally, no less than 9.5% of your before-tax salary (if you’re eligible) is paid into super by your employer, which is then taxed at a maximum of 15%. Or if you are self-employed, the amount you’ve paid into your super, if you’ve chosen to invest in one, will be at your discretion. A super fund will then invest this money over the course of a person’s working life, so they can hopefully retire comfortably.
A person can choose from a range of investment options and generally the main difference will be the level of risk they’re willing to accept to have the potential opportunity to generate higher returns. There are never guarantees of higher returns and it’s important to understand the risks and returns before you make a decision about what suits your appetite and circumstances.
Most super funds let you choose from a range or mix of investment options and asset classes. These might include ‘growth’, ‘conservative’ and ‘cash’ but the terms can differ across super funds. Here’s a small sample of the typical type of investment options available:
Growth options aim for higher returns over the long term, however losses can also be notable when markets aren’t performing. This option generally invests around 85% in shares or property.
Balanced options try to have a mix of asset investment which may impact the overall return. Generally, during a market downturn, any losses experienced may be lower. This option typically invests around 70% in shares or property, with the rest in fixed interest and cash.
Conservative options generally aim to reduce the risk of market volatility and may generate lower returns. It typically invests approx. 30% in shares and property, with the rest in fixed interest and cash.
Cash options aim to generate stable returns. It typically invests 100% in deposits with Australian deposit-taking institutions, such as banks, building societies and credit unions.
Super funds may have different allocations, so it’s important to read your super fund’s product disclosure statement in full.
Choosing the most suitable investment option generally may come down to one’s goals for retirement, their attitude to risk and the time a person has available to invest.
As a person gets closer to retirement, they may prefer a more conservative approach to investing as a share market crash can be harder to recover from.
However, if someone is five years or less from retiring, it’s important to understand the impacts any changes to an investment option may have on a retirement outcome.
People should think carefully before deciding to change investment options and if possible, speak to us to understand the implications before making a decision.
For example, if you’ve seen your super balance go down and are thinking about changing your investment option, say from a balanced fund to a conservative or cash fund, this may see you lock in any losses. It’s similar to selling a house at the bottom of a market slump – most people would think twice and consider allowing the property market time to bounce back before taking that step.
It’s not just locking in your losses to think about. Depending on the type of fund you have, there may be capital gains tax (CGT) or other tax/fee implications when switching investment options.
It’s important to remember that the decisions you make about your retirement savings at this stage in your life could potentially mean the difference between a comfortable and not-so-comfortable retirement.
If you need further help in making sure your retirement’s on track, speak to us.
We can bring the right knowledge, expertise and guidance to identify your specific goals, and help you achieve them.
©AMP Life Limited. First published April 2020