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If you think all the hard work when it comes to growing your retirement income is over once you leave the workforce, unfortunately you’re mistaken, as your savings still need careful attention.
In fact, it’s essential to keep your savings working hard so they continue to grow enough to provide you with a solid income for many years once you are no longer working.
If you don’t keep your nest egg growing, you may find you run out of money and are forced to rely on the Age Pension in the latter years of your retirement.
For most of us, the investment returns we achieve during our retirement years are actually more important than those we receive while we’re still working.
Why choosing the right investment option for your super pension matters
Selecting an appropriate investment option when you start a super pension or income stream is critical.
If you choose an investment option that takes a very conservative approach to investing your retirement savings, your investment returns are unlikely to grow enough to provide you with sustainable long-term retirement income.
Research over the years has shown that for most people, the majority of their retirement income comes from the investment earnings you achieve on your retirements savings, not your super contributions.
This finding is based on studies first undertaken in the United States 30 years ago and is still relevant for super fund members today. For most people, around 90 cents of every dollar in retirement income comes from investment earnings before and after retirement, with only 10 cents from money contributed during your working life.
Even more importantly when it comes to investing your super pension, around 60 cents in every dollar of retirement income comes from the investment earnings you achieve in retirement.
With that in mind, earning a good investment return on your retirement savings becomes even more important and the best way to achieve that is through some exposure to growth assets. Investing some of your retirement savings in these assets can also help ensure your retirement income can cope with the impact of rising inflation.
Deciding on your investment portfolio
Another key issue to consider when constructing an investment portfolio for your super pension is how much income you think you will need to live on. This includes income for essential expenses as well as discretionary spending.
Unfortunately, there is no simple answer to this, but it does influence how you invest your retirement savings. Some of your pension assets should be invested in more secure, defensive assets to provide a stable income stream to cover your essential expenses, while another portion can be invested in riskier growth assets to cover your discretionary spending.
What investment options are offered for super pensions?
Once you’ve decided on your investment strategy, it’s time to implement it using the investment options offered by your super fund. Super funds generally offer four main types of investment option when you start a super pension with them:
- Pre-mixed options based on investment risk categories
- Other pre-mixed options
- Choose your own or DIY investment mix
- Direct investments.
1. Pre-mixed options
Pre-mixed options are invested in a diversified combination of assets such as shares, property, infrastructure, fixed interest and cash. Some super funds offer up to 350 different choices when it comes to asset mixes.
The pre-mixed investment options for super pensions are usually categorised by the amount of growth assets (broadly shares and property) and labelled as High Growth, Growth, Balanced or Conservative/Capital Stable.
These are the investment options chosen by most retirees, as they provide an easy way to invest your pension assets. They are usually similar to your super fund’s pre-retirement investment options.
Pre-mixed options may be suitable if you want your super fund to work out the asset mix and diversification for you.
2. Other pre-mixed investment options
a. Socially responsible/sustainable investment options
Retirees can also choose to have their super pension assets invested in a way that considers sustainability or social responsibility factors. These options are often further tailored by their level of growth assets (such as Sustainable Growth or Balanced Socially Responsible).
These options may be suitable if you are concerned about the ethics of how your money is invested and want to foster environmental, social and governance (ESG) change through your investment dollars.
b. Indexed investment options
You can also select a diversified indexing strategy when investing your pension assets.
Indexing is often a lower cost approach to investing, as it selects assets to mirror the make-up of major investment indexes, such as the S&P/ASX 300 Index.
These could be suitable options to consider if you are concerned about investment fees and will be satisfied with achieving the benchmark investment return, rather than the highest possible return.
3. Choose your own or DIY investment mix option
With these investment options, retirees are free to create their own mix of asset classes to suit their personal circumstances, goals and risk profile.
These options generally use managed investment funds based on a single asset class such as Australian or International Shares, Global Property, Global Fixed Interest and Cash.
They are generally only suitable as an investment option if you have experience investing your own assets and want to devote time managing your pension portfolio.
4. Direct investments
These investment options offer a selection of direct investments to choose from, including direct shares, exchange traded funds (ETFs), term deposits and listed investment companies (LICs). If you owned direct investments through your super fund prior to retirement, you may be able to start your super pension without having to sell and repurchase your investments when you retire.
Direct investment options are generally only suitable if you have experience investing your own assets and want to spend the time required to successfully manage your own pension portfolio.
What happens if you don’t choose an investment option?
Not everyone wants to choose how the money in their super pension is invested.
If you don’t select an investment option when you start your super pension, your super fund will normally invest your account balance into a default investment option.
Default pension options are usually based on a Balanced or Conservative investment strategy approach.
ROSS YOUNG says
don’t forget to check the cost – so called management expense ratio of the investment base you are considering. Typically the actively managed ‘high growth’ options are going to cost you a higher percentage of your investment. There’s a fair chance the returns will be more volatile and may do no better overall than a base that is more passively managed. You need to read the product disclosure info supplied by your super fund to get an understanding of how your money is going to be managed under the option you are thinking about, starting with whether managed in house or contracted to an external fund manager.