What if by making one simple adjustment you could almost guarantee that you would increase your retirement savings over the long term? Would you take the one hour (maximum!) to do it or would you leave it in the too hard basket?
What I am referring to is making a simple change to the underlying investment option(s) within your superannuation account. Most people don’t even know what their super is invested in let alone the impact it can have on the future of their retirement savings. Listen up and you could make money out of thin air!
Investment research and history suggest that if you are exposed to certain risk factors you should receive a certain return i.e. risk and return are related, the more risk you take the more compensation you “should” expect to receive. I will refer to growth and defensive assets throughout this post, they are generally defined as follows:
Growth = RISKY (Australian shares, property, international shares, infrastructure)
Defensive = SAFE (Cash, term deposits, bonds, fixed income securities)
Most super funds have a default investment option which splits your money between 60% risky and 40% safe (give or take 5% either way) investments. So if you have never touched your super there is a 90% chance you are in a balanced option. What would happen if you shifted to a high growth option instead? A high growth option would typically be around 90% risky and 10% safe investments. Let’s look at an example.
30 year old Jim Smart - Salary of $70,000 per annum (goes up with inflation), super guarantee contributions (the ones his employer makes for him) as per legislation and a starting balance of $50,000. He decides to change from a balanced option to a high growth option. The end result? The high growth option nets Jim approximately $140,000 more than the balanced option after 30 years. And for what? Ticking a box and signing a piece of paper? Not a bad hourly rate I must say!
So what factors are at play here? Jim is taking more risk (more exposure to growth assets) and hence receiving a higher amount of return over time. Jim is also contributing funds along the way via super guarantee payments and hence increasing his exposure to the high growth factors over the time period. If Jim’s salary increases or he makes further contributions out of his own pocket the difference could be even higher!
The highs are higher, the lows are lower but the end result is a win for the high growth investor. Clearly a bumpier ride in the high growth seat! Then again how many times did you check your super balance over the last 5 – 10 years? Would you have been bothered by the bumps?
Not all superannuation investment options are created equal and there can be a million different ways to invest your superannuation. If you decided to keep it simple and go with a high growth option you just may be better off in 30 years time…..but then again no one can predict the future!
As always it’s important to consider your own circumstances as everyone’s tolerance to risk is different and your investment option(s) may not be appropriate for your situation. Please consult an expert before considering any major financial decisions, especially a change in superannuation investment option, given the impact it can have over time!
So, what’s your super invested in????