The one tweak that could grow your super by $200,000
Australians are being encouraged to take a closer look at their retirement because small changes made at an early age can add up to big differences over time.
Less than half of Australians are actively choosing how to invest their superannuation funds and almost a third know nothing about how to invest, according to research by major superannuation fund Colonial First State.
Craig Day, Colonial First State’s president of technical services, said disconnecting from your retirement comes with an opportunity cost, especially for those who don’t invest in the appropriate investment option.
“You’re potentially missing out on small differences in returns and contributions over a very long period of time, which can add a really significant amount to retirement,” he said.
For example, a 25-year-old who has a high growth option early in his working life and then switches to a “balanced” option will perform much better than someone who stays with a balanced option his entire working life.
Based on the long-term average returns of both portfolios, the first saver would retire about $200,000 more than the second saver even if they made the same contribution.
“What we’re saying here is that the lack of pensions, or the idea that the pension is somehow not an investment, has potentially huge consequences,” Mr Day told AAP.
“If you’re not sure you’re investing in the right kind of risk profile for your age and circumstances, then it may seem like a small difference in returns in a particular year, but when you compound that over 20 to 30 years, it can add up to a very large amount.”
The Australian Prudential Regulation Authority says nearly two-thirds (65 per cent) of all superannuation members have default “MySuper” funds.
24 of the 52 MySuper funds use the “lifecycle” strategy to automatically adjust their investment mix according to a member’s age, while the remainder use a one-size-fits-all approach for all their members, no matter how close or far from retirement age they are.
Typically, these funds use a “balanced” approach, combining growth assets such as stocks with “defensive” investments such as bonds that are less volatile but offer lower returns.
“It’s actually counterintuitive that someone in their 20s with a 45-year investment horizon would invest in something quite conservative, and it’s actually quite high risk,” Mr. Day said.
“It increases your risk of not actually achieving your retirement goals in the long run.”
He said defensive investments are better suited to people who are near retirement age and need to be wary of a market crash just as they start withdrawing their funds.
Australians overwhelmed by the wide range of retirement options can always benefit from the simple financial advice most super funds provide to ensure their members are in the funds best suited for their particular circumstances.
“Many funds do not even charge for providing this type of advice because it helps members meet their retirement goals,” Mr Day said.
Beyond this, Mr Day advised Australians to consider making additional contributions to their retirement.
Because it offers retirement tax benefits, an additional contribution of $20 a week would reduce an average-earning worker’s take-home pay by only about $12 to $13, he said.
“If you get used to doing this when you’re young, you won’t even miss the money anymore,” he promised.
“This becomes an automatic thing, and if this is compounded over a significant period of time, this can make a significant difference.”
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