If you’re reading this, you’re probably interested in your finances. Most of us have to be, because whether we’re making it or spending it, money drives many of our decisions: what job we take, what house we buy,what holiday we go on. However, despite a natural desire to hunt out bargains and deals, we seem to have a big blind spot when it comes to our superannuation.
It doesn’t help that terminology about super can be hard to understand and in the past has even been a bit misleading. Just as a food company can use the word “natural” on their package even if the product is actually heavily processed, your super fund may contain “ingredients” that aren’t necessarily in line with its branding, and may not sit well in your tummy.
Just ask the people who were shocked to see their fund diminish during the global financial crisis. They assumed from the name of their super account that it was low risk, not realising that a large portion of their money was invested in the share market. So how do you know what labels to trust?
Here’s how to decode superannuation:
Package deal or DIY
One of the amazing features about Australia’s superannuation system is the range of investments we can choose from to help us grow ourretirement savings. These options (or ingredients, to continue the analogy) include shares, managed funds, property and term deposits, and collectables such as artwork and rare coins.
Some of you may read this and eagerly think of how you could be entrepreneurial with your super, however, statistics suggest that most people would rather become a public speaker than contemplate putting together their own retirement investment strategy, and instead prefer to settle for the investment option chosen by their super fund. If that’s the case, read on…
The two basic super packages
1. DIVERSIFIED INVESTMENT STRATEGY
Translation: More potential risk and more potential growth
This approach typically invests a larger amount (often between 60 and 80 per cent but this depends on your provider) in growth-type assets such as shares and property, with the remainder invested in more secure assets such as cash and fixed interest. People who choose this strategy accept that some years will result in their superannuation going backwards, but remain focused on the bigger picture of higher long-term returns.
2. LIFECYCLE INVESTMENT STRATEGY
Translation: More risk when you’re young, reducing as you age
This approach invests according to your age (usually the decade you were born in) by being aggressive in the earlier years (almost 100 per cent invested in growth-type assets) and progressively becoming more conservative as retirement looms. This is done by gradually reducing the allocation to growth-type assets while increasing the allocation to more secure type assets as you progress through the decades.
While there’s merit in using either of these approaches, there’s a dangerous assumption that we’re all comfortable and completely understand the risks associated with both super “recipes”, which is a bit like assuming we all eat meat. For this reason, you should contact your super fund or review a recent statement to find out about the approach being used for your account.
Need more help
You have the right to choose the super fund and investment strategy that best suits your needs, goals and risk profile, so do your research before you decide (you may even discover that your existing arrangement is already the best one for you).
A great place to start is to use the Australian Securities & Investments Commission’s Money Smart website, which features a useful guide that’s designed to help determine your best investment strategy (visit the “How super works” tab at moneysmart.gov.au).
If done right, this decision can help ensure you’re on your way to living a comfortable and stress-free retirement.