Rethinking the life of your investment
1 Jul 2010
Most people think that once they stop working, so too does their money. You accrue your superannuation savings through contributions and investment returns while you’re working, then spend that money in retirement. But that’s not the case at all.
Money is anything but static, it keeps working for you long after you retire. Somewhat surprisingly, the majority of your investment earnings aren’t accumulated while you’re still in the workforce, but after you leave.
For the average Australian, projections show that approximately 66% of their eventual retirement benefit will come from investment returns earned on their super after they stop working.
This chart shows where your retirement income is likely to come from during the whole life of a retirement investment. It shows that returns earned before retirement average only 28%.
*Projection assumptions: 9% contributions from age 21, 4% pa wage increases, with no career breaks, 7.5% pa net investment return pre-retirement, 6.5% pa net investment return post-retirement from age 67 retirement drawdown 60% of pre-retirement salary thereafter increased in line with inflation of 2.6% pa. Source: Securing Retirement Incomes, Mercer 2009
Your investment horizon is the length of time you expect your money will spend in the market. Because this horizon is longer than the period you’re in the workforce, it makes sense to rethink this, taking a whole-of-life, rather than a whole-of-working-life, view.
This way, you’re more likely to make choices that serve you long term, keeping your benefit working for you, even while you’re drawing an income from it.
Fill up that nest egg
If you haven’t retired yet and have many more years of saving ahead of you, it’s important to accumulate as much superannuation as you can before you stop working. The more you have in your nest egg, the more you stand to benefit from that hard-working money that never stops.
That means you should be taking advantage of regular top-ups through a pre-tax salary sacrificing arrangement, or making a post-tax contribution, e.g. using your tax refund or a work bonus. If you’re eligible, you should also consider the government’s co-contributions scheme, or the benefits of making spouse contributions.
Check your profile
While topping up with regular and extra contributions is the best way to build up your super, it’s even more important that you put this money to work in those pre-retirement years by choosing the right investment profile.
Many people don’t make a deliberate choice when it comes to their super account’s investment profile, instead accepting the default investment option offered by their super fund.
However, the default option may not take into account your personal investment needs, nor accurately reflect your risk profile. Default profiles are also typically conservative, often limiting opportunities for investment growth. Your choice of investment profile can affect your final super benefit as highlighted in this second chart.
You may want to consider reviewing your investment profile – and adjust it over time, as your circumstances change. It’s important to ensure your money is working to your advantage over the long term.
Super after retirement
The fact that investment returns have such a large impact on retirement income is great news, particularly for people who may have been expecting to rely on the Age Pension for support in retirement.
If you are in this group, it might be worthwhile giving your super another look. Because most investment returns are earned after retirement, you may find that it’s not too late for an investment strategy that’s aligned to your full, i.e. ‘whole-of-life’, investment time horizon.
Your investment horizon should include your years in retirement as there is potentially still time for compound interest to be working for you – your money earns interest on interest already earned.
This whole-of-life approach also gives your retirement savings the opportunity to ride out the highs and lows of the market, even once you retire. A longer time horizon may provide more certainty in gaining higher returns through exposure to growth assets. This is because predictability of returns becomes more certain the longer the investment timeframe.
Get advice
Whatever stage you’re at in life – saving your super, almost retired, or in retirement already - it’s never too late to get the right advice. Your money has got time on its side, so speak to a financial adviser about keeping it working, long after you stop.
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