My retirement planning diary (Part 2): My super fund-amentals

The question now is whether the US market is headed for a recession, which would be bad for shares. But even if that worst-case scenario doesn’t eventuate, most experts agree that market returns will be lower in the years ahead.

Anthony Asher, an actuary and associate professor at the University of New South Wales Business School, says the good times have been rolling in Australia, the US and a handful of global markets for the past 100 years, with real returns of around 6% compared with 4% for the rest of the world, but we shouldn’t be complacent about that continuing.

In a recent article, he gives the example of the Japanese market, which has only recently reached levels last seen in the 1990s.

“Australians believe that stock markets always recover and outperform other investments, particularly bonds.” They have for the last 30 years, but Asher says recent research based on long-term historical metrics indicates that it’s unlikely the next few decades will be as good as the past.

All in all, not a great time to be retiring. Due to something called sequencing risk, the timing of your retirement matters. Retiring and beginning to withdraw income from super in a market downturn effectively locks in losses at a time in life when it’s difficult for your savings to recover.

In the face of so much uncertainty, Asher says the best thing to do now is to “enjoy the good times, diversify and don’t try to time the markets.”

Am I taking too much risk?

While the past performance of my super fund is reassuring, I’m left wondering if the investment option I’ve chosen is too high risk at this point in my life. The question is academic because at age 68 and on the brink of retirement, I’ve left it too late to change course. Even so, I’m curious.

Conventional wisdom says we should choose a high-growth option early in our working lives and gradually reduce our exposure to risk assets, such as shares, as we get closer to retirement. That holds true for people entering the workforce today who have 40 years or more until they retire to ride out market ups and downs and benefit from compounding returns.

But compulsory super wasn’t introduced until I was in my mid-30s, by which time I was raising children, freelancing and making personal super contributions when finances permitted. Like many women of my generation, I’m belatedly making up for lost time and need my super to work harder for longer.

Going back to my fund’s website, I click on the risk profiling tool. If your fund doesn’t have one, you can find them freely available online or use SuperGuide’s risk profile tool (see link below). After answering some simple questions, I’m told I may have a medium to high tolerance for risk.

Even though the recent fall in my super balance is unsettling, I’m still comfortable in an investment option with a 75:25 ratio of growth to defensive assets. But you need to determine a level of risk that will allow you to sleep at night.

While it’s easy to fixate on your retirement balance, thankfully that’s not the end of the line.

Your investments don’t stop growing when you retire

If you plan to transfer the bulk of your savings into a super pension account on retirement, as I do, the assets supporting your pension will continue to generate earnings throughout your retirement years.

Even if you reduce your exposure to risk assets, experts generally recommend keeping a significant allocation to growth assets in retirement to reduce the risk of your money running out too early.

In practice, unless you are in a lifecycle pension fund, most pension fund members are invested in a Balanced or Growth option, with the same underlying investments as their fund’s accumulation Balanced or Growth option, with significant numbers in the next risk category down.

Today’s 65-year-old female retirees can expect to live to age 88 on average, which means half will live longer. I have no way of knowing how long I will live, but as I’m fit and healthy (fingers crossed), I hope to have more than 20 years of retirement. As my super balance is only average for my age, I need to plan carefully to make it last the distance.

Before I do that, I need to take a step back to get a clearer idea of how I want to live in retirement and what it’s likely to cost. Then look at my options if there’s a gap between the two. That’s my homework for the next entry into my retirement planning diary.

Where to from here?

Your homework if you too are reviewing your retirement plans, is to:

• Find out how your super is invested – the option you are in, your exposure to growth assets, especially shares, the size of the buffer provided by defensive assets, and your investment returns over the past 5–10 years, not just this year.
• Check your risk tolerance – it may be lower than you thought, now that extreme market volatility and lower investment returns are a reality, not a theory.

After you’ve done this, if you think your super is no longer a good fit, don’t do anything in haste. Consider getting professional advice about your options. Once again, your super fund may be a good place to start your search for advice.

In the face of so much uncertainty, the experts all agree on one thing; the worst thing you can do is panic. You can’t avoid risk entirely, but you can manage it.

Over the next few months, I’ll be seeking advice, clarifying my financial and personal goals, and exploring my options.

Stay tuned.