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The government ensures that employers put 9% of your earnings into a qualifying superannuation fund.
But then what? Most Australians have no idea how the financial markets operate. This has been made more difficult by the global financial crisis, and in the past few years Australians in typical superannuation funds have gone backwards.
One problem I see is that most Australians select the “default” option in their industry fund, which means a member’s money is put into a ‘balanced’ fund. Balanced might suggest your fund is split into quarters of fixed interest, property, cash and equities.
But look at an Australian “balanced” fund at a big fund manager and you’ll find they have around 60% in equities, 15% in property, 10-13% in cash and 10-13% in fixed interest (government and corporate bonds).
When you have 60% of your retirement savings in equities – half of which is volatile global shares – then you’re unwittingly on a roller coaster.
Fund managers are fond of telling us that after every financial crisis, the Dow Jones Industrial Average rises again, to new heights.
However, when it comes to the GFC, the finance world might be reordering itself permanently into a more conservative outlook, and retirement plans based on annual returns of 10% are unrealistic.
Secondly, the theory of the unbeatable Dow doesn’t take account of timing. Retirees don’t get to hang on in the volatile share markets until their shares regain lost ground. They need funds to live on.
So a balanced fund should be more weighted to fixed-interest investments – at the expense of equities – because the bond markets are more stable than the equities markets and they spin off regular interest payments. Since 1980 Australian government bonds have made the same returns to investors as Aussie shares, but with nowhere near the volatility. Corporate bonds have returned more than Aussie shares.
Just so no one thinks I’m alone on this, remember that David Murray (chair of the Future Fund), Ken Henry (former treasury secretary), ASIC chair Greg Medcraft and former minister of finance Lindsay Tanner have all wondered at Australian fund managers’ lack of interest in fixed interest.
So what do you do?
My first recommendation would be to see a financial adviser and ask about fixed-interest investments. Secondly, approach your fund manager and inquire about a better risk-return equation. He or she might have a better fund for you, with a stronger weighting to fixed interest.
Thirdly, have you thought about your own self managed super fund (SMSF). You probably need $200,000 in super to make it worth it, and you need the right accountants and solicitors.
But an SMSF allows you to invest where you want, which means you select your own risk-return formula.
Whichever way you chose to take control, remember: it’s your super – it’s your retirement.
Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance. He runs a Q&A session on Twitter every Monday afternoon at 4pm for small business owners using the hashtag #bizQandA.
This article first appeared on Property Observer.