Ask the Expert: Playing the long game when it comes to super investment

When investing your super at a young age, it's important not to worry about short-term changes.

When investing your super at a young age, it's important not to worry about short-term changes.

Question 1

  • I’m fairly young (late 30s) and everyone tells me I should be investing aggressively into shares with my super. This is probably the right thing to do but when markets start going down I panic and can’t stop thinking about losing my money. At my age, should I be invested aggressively?

Thanks for your question and I have seen plenty of variations to this over the years, so you are definitely not alone.

As a general rule, younger people should be investing in ‘growth’ assets, such as Australian and international shares, property and private equity for two reasons.

Firstly, they have historically provided the best long-term return, and secondly because you are going to be invested for decades as you can’t take money out of super until you retire.

You can, of course, select and change investment option(s) within your super at any time.

It’s easy to get caught up in the short-term ups and downs, and sometimes the downs feel like they are never going to end – this was the feeling during the Global Financial Crisis.

However, when you zoom out it’s remarkable how consistent the long-term returns are for shares.

Take a look at the below graph, which is sourced from a wealth of common-sense website. Although it’s in relation to the US sharemarket I believe the Australian market would be similar.

The graph shows rolling 30-year returns on the S&P 500 since 1950 (the blue line) compared to the latest one-year returns (the orange bars) for each 30-year period are shown below.

As you can see, one-year returns can be very volatile. However, when you step back and take a long-term view, it’s significant how consistent the US sharemarket has been, averaging over 10 per cent per annum.

Having said the above, I realise emotion can take over when markets are going down and it’s all over various news outlets.

If you invest in a high-growth option then switch to cash when markets get wobbly, that’s the worst outcome.

Speak with your super fund or financial adviser about selecting an investment option that you are comfortable with and will stick with regardless of short-term market movements.

Question 2

  • What advice do you have with regards to the change in legislation. If I am not yet retired, and have near $1 million in super. My modelling shows that if I continue to utilise the concessional contribution cap up to my retirement at age 65, I may go over the $3 million account balance at some point in the pension phase. Should I avoid extra super contributions now?

It’s not something I would be panicking about yet.

As a recap, the government intends to put a further 15 per cent tax on super earnings on the part of the balance that is over $3 million.

Firstly, though, it’s not yet legislated so we will have to wait and see exactly what it will look like.

Secondly, although the government has stated it will not automatically index the $3 million figure, I would expect at some time in the future there is a high likelihood this number will be increased.

Just like marginal tax rates aren’t indexed, from time to time government will increase these thresholds.

Thirdly, it’s usually a lot harder to get money into super then take it out once you are older and retired.

Therefore, at 65 if you find another investment vehicle that would be better suited you can look to rearrange your affairs at that time.

However, you may also find that super is still the best way to go, for the bulk of your retirement savings at least.

Finally, remember there are always different risks associated with investing.

One of them is legislation risk, that is the risk that legislation will change in the future which could negatively impact your investment.

A lot can change between now and when you turn 65. Not only with rules but your personal circumstances – you may lose your job and be in a position where you can’t contribute to super any more.

And going from $1 million to $3 million will take considerable time and again things may change in the interim.

You just need to make the best decision you can with the current information and legislation that is in place.

For most people, super is great investment vehicle for your retirement savings. Once you have super savings close to $3 million then I suggest seeking personal advice.

Question 3

  • My mum recently divorced at 72. She’s never worked, has no superannuation. She lives off the rentals of their financial split of three properties and one primary home that’s too small for her to comfortably live in – she’s living on $200 a week after taxes and expenses. Is she entitled to a pension? Properties are valued at approx $2 million.

If your mum is now divorced, she should be classified as single by Centrelink.

A single home owner can have assets up to $656,500 (not including their main residence) and be eligible for a part age pension.

If your mum’s share of assets and investments is greater than this, she is not eligible.

If she is short on income, she could look at selling an investment property, placing the funds into a high-yielding account and drawing down on the balance regularly.

Alternatively, she could access a reverse mortgage via the Home Equity Access Scheme (HEAS).

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.

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