This week’s dramatic events on the sharemarket will have got a lot of people spooked – and none more so than those getting close to retirement.
For young people, lurches on the sharemarkets don’t matter much because there’s plenty of time to make up the losses.
But if you’re nearing retirement, big hits to your superannuation could have a direct effect on how much money you retire with.
Since the beginning of the financial year (July 1), the ASX 200 has lost 6.2 per cent of its value.
Super fund returns are also down, though not by that much.
Members of AustralianSuper who are in the fund’s default MySuper option have now lost 2.5 per cent of their balance since the beginning of July.
So if you started the year with $100,000, you now have $97,500 (excluding contributions).
Back in mid-July, however, the year-to-date gains were almost 4 per cent, meaning you would have had $104,000 (again, excluding contributions). That means returns have fallen by more than 6 per cent since mid-July.
AustralianSuper is one of the few super funds that reports its returns on a near real-time basis. However, given all super funds have a similar exposure to sharemarkets, the figures will be similar across the board.
This is nothing to be surprised about. Super funds expect sharemarkets to be volatile. The idea is that, over the long term, it will all level out to a decent return.
For people close to retirement, however, it is a different story.
Imagine you are planning to retire next year. If there is a major crash between now and then, and hundreds of thousands of dollars are wiped off your balance, that could leave you far worse off.
This is exactly what happened during the global financial crisis struck in 2008.
Between July 2007 and February 2009, the ASX 200 lost half of its value. Sharemarkets around the world fell by similar amounts.
Imagine one person who retired in 2007 with $400,000 in super, and withdrew that money and put it in the bank. By February 2009, that money still existed and, minus income drawdown, would have been protected.
But imagine another person with the same amount of money in their super, who retired in February 2009. By then, their super might have been worth as little as $260,000. That’s a loss of $140,000.
The GFC was a very extreme example. This week’s events don’t even come close. As CommSec market analyst Tom Piotrowski told The New Daily, it was just “a good old-fashioned correction”.
However, if it got you nervous about your super, it could serve as a wake-up call to pay a bit more attention to how your super is invested.
The different options
Most industry and public sector funds leave their members in their default MySuper options until they retire, unless the member tells them not to.
Those MySuper options generally have about 70 per cent of the balance invested in riskier growth assets – shares – and the remaining 30 per cent in more defensive assets like infrastructure, property, bonds and cash.
Funds usually have a bog standard ‘conservative’ option, which puts a little under half of your balance in shares, and the rest in more defensive assets. When sharemarkets do well, conservative options underperform MySuper options. When sharemarkets tank, conservative options don’t do as badly as MySuper options.
Most funds will also give you the opportunity to put all you money in cash, which guarantees you will not lose any money; but it also guarantees that your money won’t grow. In fact, once you take inflation into account, you are likely to lose money in cash options.
All this can be clearly seen in AustralianSuper’s recent returns. That fund’s MySuper option is down 2.5 per cent for the year to date, while the Conservative Balanced option is down by just 1.68 per cent. The cash option, meanwhile, is up 0.33 per cent.
People aged over 50 should consider using this week’s events as a wake-up call to think about what they want out of their super.
Most super funds have comprehensive websites with extensive information about investment options. Most also offer some general financial advice for free, and more detailed advice for a fee.