Finance Your Super Ask the Expert: How much of my super should be held in cash?
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Ask the Expert: How much of my super should be held in cash?

Redundancy and retirement plans
Licensed financial adviser Craig Sankey answers your burning finance questions. Photo: TND
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Question: My wife and I are self-funded retirees and have $1 million with AustralianSuper, drawing down the minimum pension. We have 95 per cent in the Stable option with the balance of 5 per cent in the Cash option. Because of the very low return on the Cash option, should we transfer that 5 per cent to the Stable option? Regards, Chris

Answer: Thanks for your question, Chris.

Having a large balance within the retirement phase of super, in this case via an AustralianSuper Income Choice account, and only drawing the minimum pension, is a way of self-insuring so you don’t run down all of your funds.

Further to this, the government has halved the minimum amounts you need to take from an account-based pension for the 2019-20 and 2020-21 financial years due to COVID 19, as can be seen in the following table.

You’re right that cash returns are very low at the moment, and with interest rates at record lows this is likely to stay that way for quite some time.

This means cash returns will be below the minimum drawdown requirements above, which means you will be drawing down on some capital. This is not necessarily a bad thing, in fact that is what the system is designed to do.

According to the AustralianSuper investment guide, the stable option still invests in 25 per cent cash and a further 30 per cent in fixed interest so it is still a relatively low volatile option, but does have some exposure to shares and unlisted assets in order to achieve a higher return.

The stable option aims to outperform CPI by 1.5 per cent per annum over the medium term, with a minimum suggested time frame of three years. But historically it has outperformed its investment objectives.

Inflation, in this case measured by CPI, is currently very low, so don’t expect big returns. However, it’s the net return above inflation that really matters.

Even when you are in retirement, you still could have a long investment timeframe. For example, an Australian female aged 65 still has a life expectancy of 22.7 years, and half of females will live longer than this.

This is why I would not recommend holding too much money in cash as it rarely keeps pace with inflation, so its effective purchasing power diminishes over time.

Having said this, many people do hold a small amount in cash and draw down on this portion first, thereby allowing their other investments to ride out any downturns before having to use those funds.

Although over the average retirement timeline, this strategy has shown not to make a material difference on a person’s balance, it can provide people with peace of mind that their income is coming from a stable and secure source.

In your case, if you are drawing down the cash first, this may be appropriate, and the cash option could be fully utilised within the next one to two years.

I suggest speaking with a financial adviser or AustralianSuper about all their investment options in order to select the most appropriate option(s). They will take into account your risk profile, timeframe and objectives.

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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