Often when we talk about superannuation we imagine steady returns as the fund grows onwards and upwards toward our retirement. Reality, as we have experienced in recent times, can be very different because results tend to vary from year to year – and the results are not always positive.
Superannuation is not an investment – ??
People often talk about superannuation as if it is an investment. However, superannuation is not in itself an investment – rather, it is a concessionally taxed structure in which investment assets are held, which is set up to encourage Australians to save for retirement. A flat tax rate of 15% levied on fund income and capital gains means that most people who earn over $34,000 per annum are able to achieve better after tax returns than investing in the same assets outside of superannuation.
However, superannuation does have its drawbacks – money is generally locked away until you are able to meet a condition of release, such as retirement, and there are restrictions on how the money can be invested.
Public Perceptions and Education
For many Australians, superannuation is all too hard. It is often easier to accept whatever they are given, ie the default fund under fund choice and the default investment option. Many super fund members do not realise they may be able to choose their super fund and their underlying superannuation investments.
An ongoing quest by advisers, superannuation funds and the government aims to enable ordinary Australians as superannuation fund members to:
- understand asset classes and risk and return
- accept that short-term returns can be volatile in assets where long term returns are higher
- appreciate the value of dollar cost averaging (most employees unknowingly use this technique when their employers pay superannuation guarantee contributions quarterly or more frequently)
- understand normal business and investment cycles
Impact on retirement plans
A period of negative returns has shcked many people who were planning to retire in the near future. With around 4 years of double-digit returns, some people had become blasé and felt retirement planning was easy. They may now be disillusioned and looking for options.
A common cry my colleagues and I hear (as Financial Advisers) is ‘I’ve lost my money’. To be more precise, a the individual superannuation fund member would have purchased assets and these purchased assets have reduced in value. If the individual doesn’t panic and sell these assets … they would not have actually lost any money. The restoration in value of the assets owned will depend upon the economic recovery and the quality of the assets.
Some choices for people near retirement to consider in a volatile market are:
- defer retirement by working longer – perhaps moving to a less stressful job or one with shorter hours
- increase contribution levels to superanuation
- invest more agressively for higher returns when the markets recover
- accept a lower standard of living in retirement
None of these options may be completely palatable, but they do reflect some common realities which many people need to consider.
Most issues can be addressed by good forward planning … which can assist to minimise any disruption to the achievement of an individuals goals and objectives. Regular review and open honest discussion with an adviser you trust are of the utmost importance if you are concerned about your capacity to achieve your goals and objectives.
Where to from here?
