Low risk super puts a better retirement at risk

I'M a firm believer that superannuation has a lot going for it.

Without super many Australians would end up facing a very thrifty retirement, and because we can't normally access our super until preservation age - between 55 and 60 depending on when you were born, our nest egg benefits from healthy long term returns.

Just what sort of returns your fund will achieve depends on the investment option you select for your super.

According to research group SuperRatings, last year was a bumper one for super with balanced funds delivering returns of around 11.7% for the 2012 calendar year.
The key driver was returns of 17.9% for Australian shares and 13.6% for international shares.

Many people are surprised to learn that 'balanced' funds have a sizeable proportion - usually around 60% to 70% of the fund's money invested in sharemarkets. It's a strategy that makes a lot of sense though. Quality shares grow in value over time to provide capital gains that add to ongoing dividend income. Both help to grow your super.

The downside is that equity markets move in cycles, and the value of your super can take a hit at times when shares are experiencing dips. But over the long run the upswings will more than make up for the downturns.

This is an important issue to consider when it comes to choosing how your super is invested. A recent industry survey found that one in two young workers would choose a 'low risk' option. During the height of the financial crisis when stock markets tanked, many people did just that - shifting their nest egg from balanced or growth options to low risk choices.

On the face of it, choosing a low risk strategy for your super can seem like a good idea. After all, none of us want to jeopardise our retirement nest egg.

That catch is that low risk equals low returns. By ticking the low risk box on your fund's menu of options you face the prospect that your super may not earn sufficient returns to outpace inflation.

In fact this same survey found someone sticking with a low risk super option for a 40-year working life could be $170,000 worse off in retirement than if they chose a higher risk growth option.

It all highlights the need to understand how your super is invested - and whether it's the best choice for your life stage.

If you are in, or near, retirement switching at least part of your nest egg to low risk investments can be a sensible strategy and your financial advisor can help you with this decision.

For the rest of us, choosing a balanced, growth or high growth strategy will see your fund's value move around from year to year. Over time however you should reap the rewards of higher returns - and that means more money to live on in retirement.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.

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