As part of your retirement savings plan, it is important you understand how your superannuation money is invested by your super fund.
No two people’s financial situation and investment requirements are the same. To cater for these different needs, most superannuation funds offer you a choice about how your superannuation money is invested. Funds offer a range of different investment portfolios that you can choose from. You can also choose to spread your super money over multiple investment portfolios.
One advantage of investment earnings in super is that they are taxed differently to your other income.
The maximum tax rate on superannuation investment earnings is currently 15 per cent, compared to the marginal tax rate that is applied to your investment earnings and income outside superannuation, which could be up to 45 per cent (not including Medicare Levy and Temporary Budget Repair Levy).
The different investment options
Most superannuation funds will offer a range of investment options for you to choose from. These will vary in their level of risk and the kinds of assets held within them.
You may see terms such as Growth, Balanced, Conservative and Cash.
Other funds may refer to investment options like Australian Equities, International Equities, Sustainable Shares, Property, and Fixed Interest.
Further information about the options available, the assets held within them and the likely risks and returns should be available on your fund’s website.
Why should I care how my super is invested?
You’re probably thinking it’s not your job to worry about how your super is invested, but it pays to take an interest. Investment choice can have a big impact on the final lump sum that you receive when you retire, due to the impact of compound interest. Over a working lifetime, the same amount of money invested in different investment options can produce different results at the end. Therefore it’s important the take the time to understand the different options available to you and the potential impact it could have on your investment earning.
How do I choose?
Your age is very important when it comes to making an investment choice.
When you join a fund you are asked if you would like to choose a specific investment option on the form. If you don’t choose an investment option you are placed in what is commonly called the default option.
If you didn’t choose a specific investment option when you joined the fund this doesn’t mean you can’t select one later.
When it comes to choosing which investment option is most suitable for your superannuation savings, there are a couple of basic questions that you need to ask yourself before making a decision:
How much risk do I feel comfortable taking?
What type of return am I seeking for my money?
How long will I be investing for?
The answers to these questions will help guide you in choosing the right investment option or mix of options for your superannuation savings.
Your age is very important when it comes to making an investment choice. How long you expect your money to remain invested (or your investment timeframe), will have a significant impact on the investment mix that is most appropriate for you.
If you are young and have a long time until you will need to access your money, the short term ups and downs that can occur when investing in higher risk options such as shares may not be so important. History has shown that over the long term, short term fluctuations tend to be outweighed by the higher returns from these ‘riskier’ types of assets.
If you will need to access your money soon, it may be more appropriate to protect it by investing in assets that are considered lower risk, even though this may result in lower returns over the medium to long term. On the other hand people entering retirement may still have 20-30 years to plan for. Depending on your appetite for risk, it may still be appropriate to invest some or even most of your savings in ‘growth’ products for the longer term.
Reproduced with the permission of the The Association of Superannuation Funds of Australia Limited. This article was originally published at www.superguru.com.au
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