INSIGHTS WITH EVALESCO
Or why the Government have it wrong and you are missing out on thousands!
Most people don’t take much interest in their superannuation. Why would you, as it will be decades before you receive it.
Let me then provide an alternate view that could help make you thousands, if not tens of thousands in the long run.
Firstly, your superannuation will most likely be your second biggest asset behind your home so it’s worth taking some interest in.
Secondly, with COVID-19, many people (over 3.5 million) took advantage of the Government’s option to be able to withdraw $10,000 from their super in 2020 and so for many, super was not about waiting until retirement to provide a benefit.
So why everyone should consider moving their superannuation investment focus to High Growth or Shares – and yes you can.
Did you know that over 80% of us are invested in what’s called the Balanced Fund option as this is the default option for most employer superannuation funds? Why?
The Balanced fund option has been chosen for you not because of the facts of past performance (as that would be a High Growth fund) but because it is the middle option between High Growth and Conservative (as Balanced should be 50% growth assets and 50% defensive assets). With anything in life if provided with three options, most people (including Governments) as you would guess, choose the safe, middle option as not too risky and not too safe – the ‘just right’ option as Goldilocks famously said. For most people, this is ‘not right’.
You would even think those that have advisers would help get the right investment mix but they also have one hand tied behind their back by their Risk Profile and Tolerance questionnaire that they are required to ask of any prospective client, to comply with government standards. While I agree important and necessary to do, if you look at the questions or the detail, most people regardless of their investor history, tend to still pick the middle option and so will still end up putting their funds into the Balanced option unless their adviser helps educate and understand a different approach.
So that is the psychology but what are the ‘facts’? Well, historically, High Growth outperforms on average a minimum of 2% per annum better than the Balanced Fund. For the last 10 years it has nearly been 4% pa. This is not too surprising as High Growth Funds have a higher percentage of growth assets such as shares and property which have historically outperformed cash and bonds (as long as you take a minimum 10-year period).
The other reason is again based on psychology. We’re all human after all. Most ignore good news but make a big deal when they hear bad news. For example, since the GFC in 2008 – the last major sharemarket drop until 2020 – we have had 12 positive years of sharemarket growth and some of those years’ returns were over 20% pa. Most would not know that because when we have one bad year in 2020, the world seemingly was going to end based on the media and markets commentary. One bad year in 12 is not bad but, again, most people go for the safe, middle option.
My view is that as long as you have an investment horizon of more than 10 years (to take into account a bad year), having a higher percentage in a well-diversified share portfolio under your existing super plan (High Growth Fund), makes perfect sense. It will also most likely double your money over the long term (see below and which one you prefer). This is especially true for most in relation to their superannuation, as it’s 20 to 30 years before you can access it.
Hopefully after reading this and checking out the diagram above, you can see the potential growth you could achieve, and you’ll take action. Go online to your superannuation fund and do your own research of how your default Balanced fund stacks up over 10 years historical returns against your High Growth option. Never just look at last 12 months returns or even 3 years as not long enough to give you an accurate consistent average.
Let’s make this year, the year you get your superfund working harder for you and understand Goldilocks did not have it right this time round!
Source: Marc Bineham, 2022, The Money Sandwich
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The amount of super you’ll need when you retire depends on your big costs in retirement and the lifestyle you want. The Associate of Superannuation Funds of Australia (ASFA) estimates for a single $44,224 a year and for couples $62,562 a year is how much you may need. This is only an indicator and our advisers assess everyone’s individual circumstances.
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One thing to consider is the interest rate on your home loan in comparison to the rate of return on your super fund. Before making a decision, it’s also important to weigh up your stage in life, particularly your age and your appetite for risk. Whatever strategy you choose you’ll need to regularly review your options if you’re making regular voluntary super contributions or extra mortgage repayments. As bank interest rates move and markets fluctuate, the strategy you choose today may be different from the one that is right for you in the future
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