When the superannuation annual statements start landing in our mailboxes, inevitably there’s discussion about how well super is performing, writes Mark Bouris, of Yellow Brick Road.
It’s a good time to remind ourselves that superannuation is not an investment – super is a tax and legal structure to create an income in your retirement.
Superannuation is a government regulated way to boost long term savings with generous tax concessions, as the mainstay of your retirement nest egg alongside your home. Your employer has to contribute 9.5 per cent of your wages into a complying super fund, and these contributions are taxed at 15 per cent, not the usually much higher marginal tax rate of your wages.
Once this money is in your account the earnings from the investment is taxed an average of 8 per cent. When you retire and draw down your lump sum, you pay zero tax on any earnings your investments then produce – another great benefit.
The price for all this is that once your money is in super, it is there until you retire.
The performance of your super really depends on the types of things (asset classes) you are invested in.
Growth assets like shares and property are more likely to produce shorter term fluctuations in their price. History has shown that shares have performed in this group over the past 100 years. But to get these returns you must invest for at least 10 years to weather the volatility they can create. This requires discipline, calmness and the ability to stay focused on the long term result above the noise of today.
At the other end of the spectrum, putting your money in cash is a more stable. But when interest rates are low – as they are now – you risk losing your earnings to inflation. Generally you need to aim to produce an overall return from your super after tax and fees that is two per cent to four per cent a year better than inflation to enjoy a decent retirement. Adding in more than the regulated 9.5 per cent of wages is also required.
In between cash and equities, there are fixed interest investments such as government, corporate debt and property. They are more volatile than cash but don’t have the same returns as shares.
Where should your super be invested? Match your planned retirement length to the asset classes that will produce enough income for that time. For a 65 year old today this is at least 20 years. In the past, people would switch to cash or fixed interest from any growth investments they held which is seemingly prudent but it is very dangerous as it maximises the impact of your number one risk. That risk is that you run out of money too early or have to live on much less than you would like.
A better way is to simply place one to two years of income into cash and bonds in a separate account. This means you have immediate living expenses covered for a few years, while your nest egg is growing and the price moves around in the short term.
The main point to remember as the super statements arrive: Super is not the investment, but you can actively manage your investment options within super to ensure you gain the best returns commensurate with your timelines.
