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Tracey Spicer talks to Associate Professor Banita Bissoondoyal-Bheenick from RMIT about the importance of choosing the right investment option for you, not just through a pandemic, but for the long-term.
Transcript
Tracey Spicer
Hi, I’m Tracey Spicer. How do you work out which investment option to choose when it comes to your super? This is something that we’re struggling with at the moment, and perhaps it’s something you’ve struggled with. So I thought we’d get an expert in. Associate Professor Banita Bissoondoyal-Bheenick is the Associate Dean of Finance at RMIT and she’s kindly agreed to give us some of her time today. Banita, first of all, I know you’re in Victoria. How are you holding up there at the moment?
Associate Professor Banita Bissoondoyal-Bheenick
Thank you very much, Tracey, for having me to have this chat, which is a very important topic to talk right now. But more importantly, right now in Victoria, we’re in stage four lockdown, as we all know. And we all know that the country is right behind us in Victoria.
Tracey Spicer
Our hearts go out to you all Banita at this terrible time. And of course, what we’re talking about when it comes to health and mental health is really related to our conversation today on investment options in super, because people don’t only want a comfortable retirement, they want a healthy retirement. If you can’t afford to pay for the medical care, then you’re really in a bad way. And we know this pandemic is affecting older people much more than other sectors of the population.
What’s your advice when it comes to working your way through this thicket of investment options when it comes to superannuation?
Associate Professor Banita Bissoondoyal-Bheenick
Now, this is not just something, you know, because of the pandemic that we have to be really concerned. It has been an ongoing debate for years because we we have a pension system which is pretty much ranked third in the world, as we all know. But yet we have a lot of challenges. So one of the key focus, we have seen changes across the globe. We have seen a change from a defined benefit to defined contribution throughout the globe.
But in the Australian system, what we should not forget that what we have seen this change from the defined benefit to defined contribution, but even in the defined contribution, when we compare that to the rest of the world, we should not forget our defined contribution is still very much focused on investment in equities. If I compare that to Canada, to US countries. So in addition to other risk that as members, as individuals, as retirees that we are faced, for example, we talk about sequencing risk, longevity risk, that’s all there very important risk that we should talk.
A very important risk that we have is investment risk, because most of us being in a defined contribution, one of the things that our retirement balance is going to be comprised of is what goes in the accumulation phase. So this is where the investment option, the choice of your investment option matters a lot. So what our research has clearly shown is that at the current point in time, around 75-80% of Australian working population do not make the choice, when they actually enter the workforce. We tend to ignore which investment choice will be the right one. So this is not the right thing to do because we tend to think that we are going to retire, say, someone who starts working at the age of 20, 25. Well, it’s not the perfect job. It’s not the peak of your job where you hit the highest pay that you have. You haven’t reached the highest level of education that you want to achieve, but it’s your first job and you’ve hit the superannuation and that starts the clock starts ticking, the balance starts increasing.
So you have to make that choice now. And a lot of people and this is where the data shows 80% of the population roughly does not make that particular choice, which is alarming, very alarming to put that bluntly. So a lot of people go in that default option. So what our research has clearly shown is that, you know, we have to take the aggressive option because over the longer term, clearly, the higher the risk taking, the higher would be your return.
And in particular, when you’re talking superannuation, the way the pension system is phased, we have our Age Pension plus a very important component is a superannuation, which is the preserved component. So we are talking a longer term investment. So over the longer term, it pays off definitely to take that extra bit of risk. So that extra bit of risk implies that investment options, which are in the aggressive option, when I’m saying aggressive options, that is you’re talking those which are investing in those risky assets in the market.
So what we should also be very cautious here is that we have so many labels in the Australian investment option in the superannuation industry. So we have to be very careful because 75-80% percent of the population goes in a default option, which is technically a balanced option. Now, how do we define that balanced option? Some super funds define a balanced option. It can go even up to 75% in an aggressive, in a growth asset.
So we have to really look into what are the labels that is out there and clearly assess what is our risk profile.
So now our research has also shown that over the life of that accumulation phase that I’m talking, we are going to be faced with market downturns. If I take the current pandemic situation. We have seen in the past the global financial crisis, for instance. Now, the pandemic is a major one, which is most probably not equal, same ingredients as we’ve had in the global financial crisis, but yet the volatility in the market is huge.
So the returns in the super funds are actually being hit largely. So we have to be very cautious here at the same time that we have to think it’s a longer term strategy, that we are looking in investment options. So what we are choosing here has to be over the longer term. So what our research has shown that even if you have market downturns like a GFC, it takes on average 10 years to recover your particular loss.
So how do I interpret that particular results? Of course, it depends on your risk profile, but I’m just saying, if you are 40 years old, what my research is showing that at the age of 40, if we are hit with a significant downturn like a GFC or a pandemic like this, it takes 10 years to recover your particular loss. So your money is being preserved. So at the age of 40, you’ll recover that particular loss.
So therefore, do not rush and make that particular change on your investment options. So choosing the right investment option is extremely important. The key message, what I’m trying to make here, it pays off really of taking that extra bit of risk, because the higher the risk, the higher return still holds in the market.
Tracey Spicer
How does it change if you’re someone who’s not 40, if you’re someone who’s approaching retirement.
Associate Professor Banita Bissoondoyal-Bheenick
Now, if someone is approaching retirement, it is something that, of course, is a very important consideration to take into account. Now, we have heard a lot about the concept of de-risking. Now, it is extremely important because we all know that as you’re getting older, your risk level changes and normal financial planners and your advisers would say that, you know, you should be moving towards a more conservative investment option.
But that said, we should not forget a very important risk that we face these days is longevity risk. Now, in the past, it was very clear that retirees, one of the things that you were concerned is you are concerned about protecting your money. But what you have to be very much concerned these days is that you don’t want to retire and then you don’t have enough money, while the longevity risk matters a lot, that you don’t have enough money and you’re still living and you are not able to maintain that particular lifestyle.
So when you’re considering de-risking that is moving towards more conservative asset, as you say, this is someone, you know, age 50, whether you consider, you know, close to retirement being 50, that’s another question in itself these days. We have to consider two things. First, longevity risk, because you don’t want to move in a situation you don’t have, you’re going to outlive.
And for women, I would highlight, don’t forget the fact that we on average live longer than men. So that’s a very important factor to take into account.
And also, when you’re considering de-risking what you should take into account, what is the current balance? Have we actually achieve that accumulated wealth at that particular point in time before we actually start de-risking? So that’s a very important consideration. It should not be a blanket rule for everyone. Because let’s say I’m age 50 and my superannuation balance being a woman, for instance, my superannuation balance is pretty low because I’ve had several career breaks or even for a male, you know, I haven’t had enough opportunity.
And at the age of 50, I’ve hit that career that I really want to achieve that salary that I really wanted. Bearing in mind that 9.5% is pretty much the blanket percentage across every single industry except some industries that we have. But 9.5%, of course is not adequate. So have we reached that accumulated wealth before we start de-risking? So it is extremely important that we want to ensure that investors need to seek growth to ensure that they have enough money to last throughout their retirement.
So that’s an extremely important consideration. So, of course your risk profile, once again reiterating, matters a lot and your financial education matters a lot. And even if you are trying to put your money in a stable investment at the age close to retirement, one of the key things to consider very importantly, is that you should not be eliminating stocks entirely from your portfolio. That’s one of the things to consider because retirement could last 30 years.
And when we’re talking, based on the research we have shown, is that a higher exposure to growth assets can significantly increase your level of income. And even if you’re talking a downturn of like a GFC, it takes 10 years on average to recover your particular loss. So if your retirement is lasting 30 years, you still have time to recover for that particular loss.
And of course, I’m not trying to say at retirement age, you have to have really aggressive kind of investment option. But what I’m trying to say here is you should not be completely eliminating aggressive growth options or investment out of your investment options.
Tracey Spicer
That’s so interesting to reframe the idea of risk when it comes to longevity, because often we forget about how long we have to live on this money for. You mentioned before about how women retire or much less money than men. I’d like to pick your brains about that does not mean that women over their lifetimes perhaps do have to go into more high risk investments to get the returns that they need because of the money lost on career breaks, for example.
Associate Professor Banita Bissoondoyal-Bheenick
Definitely. So for women in particular, it’s way more important to actually consider investment options because there are certain facts, not just because of the pandemic, the pandemic. Currently we have seen so many sectors. Women are way more disadvantaged as compared to men right now. And we have seen so many women who have lost their job. The data is clearly showing that women are way more disadvantaged and straight implication if we are losing our job, the implication is on the superannuation, which is not much talked and debated a lot.
So very importantly, we already know some basic facts around women. We have on average, 40% of the population who work part-time are women. We already know that the 9.5% (superannuation guarantee), which is provided, we already know there is a problem around this adequacy of that percentage, and this is not just for women, it’s for men as well.
So for women, when we’re talking, we’re having significant career breaks, and by the time we enter back into the workforce, have we hit that salary that we actually require to build that wealth that I was talking earlier, that accumulated wealth that you require? Have we actually built that particular accumulated wealth? It’s not even at the age of 40, 45. Some women still haven’t hit that yet. And pointing around the fact that a lot of women work part time, so in that particular case, it’s very, very concerning.
It takes way longer for women to build on that accumulated wealth that I’m referring because a large proportion of women, for instance, don’t even qualify to have superannuation being paid. The data I was looking at some data recently and to qualify, for example, for superannuation to be paid, we all know that we have to earn $450 per month from one employer. A lot of women work several casual jobs, so we don’t even qualify for that.
So from the perspective that making the right choice are on your investment options becomes way more important for these women who have a smaller balance to start off as compared to male counterparts, because there is way more effort for women to actually build on the investment options. It is also known that from data that has been released, that women, single women above 65, 40% of women are living below the poverty line.
Why is that? Clearly, you know, there is a need for more work. And one of the things that the fact that we, most of us fall in a defined contribution, the investment option matters a lot. There is a need for more financial literacy. There is a need for more change of policy, in particular to support more women to build on the retirement nest egg.
Tracey Spicer
Thank you so much for your fascinating insights, Associate Professor and stay safe.
Associate Professor Banita Bissoondoyal-Bheenick
Thank you, Tracey.
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