Do your eyes glaze over when your superannuation statement lands in your inbox?
Maybe you bin letters from your super fund when they arrive in the mail?
Superannuation can seem overwhelming and tempting to put in the ‘I’ll-get-to-it-later’ basket.
But once you understand the basics, you can make much better decisions about how you want your nest egg invested.
Make no mistake, one of the worst things you can do is to not make a decision at all and let your money sit in a default option without knowing how your investment works.
Unless you direct them otherwise, your employer will pay your super into a default option known as a MySuper account.
Steps Financial principal Antoinette Mullins said everyone should make an investment selection.
“You might choose the default one, but make that choice. Don’t just let someone else choose for you because it’s such an important thing,” she said.
What are my investment options?
Ms Mullins said the first thing to understand is each investment option offered by a super fund will be a mix of growth and defensive assets.
In other words, it will have a different ‘asset allocation’.
Growth assets include domestic and international shares and property securities, while defensive assets include cash and fixed interest bonds.
Over time, defensive assets are generally less risky but deliver lower returns, whereas the opposite is true for growth assets.
Ms Mullins said growth assets like shares fluctuate in value more often, which in turn affects your superannuation balance.
“It shrinks and grows and shrinks and grows and that’s where the volatility and rollercoaster ride of growth investments comes into play,” she said.
Ms Mullins said a default fund like a MySuper balanced account typically has 70 per cent in growth assets and 30 per cent in defensive, whereas the split for a more aggressive growth option might be 85 per cent growth and 15 per cent defensive.
Conservative investment options might be evenly split between growth and defensive assets.
As you edge closer to retirement, a MySuper account will have more defensive investments because it is assumed you will soon need to draw on your super and should therefore accept less volatility.
“Something that needs to be remembered is that even though you are … 65 and starting to draw down on your superannuation through a pension, you don’t need all of your money on day one; you still need your money to last 20, possibly 30 years into retirement,” Ms Mullins said.
“So even though you are in the pension phase, you still have a very long timeframe for investment.
“As a retiree, or gearing up for retirement, you need a higher allocation to cash to fund your income requirement. But that doesn’t mean you need to switch out of everything and go [all] into defensive.”
Which option is right for me?
To get started, you can complete your superannuation fund’s risk profile questionnaire to help you choose an investment option that matches your tolerance for risk.
Along with how close you are to retirement, you need to be comfortable with the level of risk you have chosen for your investment.
Ms Mullins said even if your retirement is decades away you shouldn’t necessarily choose a high-growth fund with a risky asset allocation if you find news headlines about sharemarket volatility stressful.
“Being young or old doesn’t matter, it’s your comfort level with that volatility and the news headlines,” Ms Mullins said.
“You need to pass the sleep test – if something keeps you awake at night, change it.”
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