Provided by Mercer: 12/4/10
Generally you expect to accrue superannuation savings through contributions and investment returns while you’re working. Then, spend that money in retirement, right?
The truth is, even though you’ll probably stop working one day, your super won’t.
It’s seems reasonable to assume that most of the investment earnings on your retirement nest egg are accumulated during the time you spend in the workforce. But did you know that your money keeps working for you after you retire? In fact, projections show that for the average Australian, approximately 66%* of their eventual retirement benefit will come from investment returns earned on their super investment after they stop working. Surprising, isn’t it?
The projection* below illustrates where the source of retirement income is likely to come from over the whole life of a retirement investment.
*Projection assumptions: 9% contributions from age 21, 4% pa wage increases, with no career breaks, 7.5% pa net investment return pre-retirement, 6.5% pa net investment return post-retirement from age 67 retirement drawdown 60% of pre-retirement salary thereafter increased in line with inflation of 2.6% pa.
Source: Securing Retirement Incomes, Mercer 2009
The fact that investment returns have such a large impact on retirement income is great news, particularly for people who may have been expecting to rely on the Age Pension for support in retirement. If you are in this group, it might be worthwhile giving your super another look. Because most investment returns are earned after retirement, you may find that it is not too late to implement an investment strategy appropriately aligned to your full investment time horizon.
Time is on your side
Your investment “time horizon” is the length of time you anticipate your money will spend in the market. Remember the surprising truth about your super: your investment time horizon is longer than just the period you’re in the workforce! By taking a whole-of-life view to your time horizon, you are more likely to make choices that serve you long term, so that your benefit keeps working for you, even while you’re drawing an income from it.
An investment horizon should include your years in retirement as there is potentially still time for compound interest to be working for you – your money earns interest on interest already earned. From a whole of life point of view, having an appropriate investment strategy in place may mean more time for compound interest to be working in your favour.
This ‘whole-of-life’ approach also gives your retirement savings the opportunity to ride out the highs and lows of the market, even once you retire. A longer time horizon may provide more certainty in gaining higher returns though exposure to growth investments. This is because predicability of returns becomes more certain the longer the investment timeframe.
Does your investment choice reflect your current position?
Taking a “whole of life” view of your retirement income (as opposed to a “whole of working life” view) means taking account of where you are any point in your investment time horizon. Many people don’t make an active investment choice for their super and simply accept the default investment option offered by their super fund . However, the default investment option may not take into account your personal investment needs, and may not accurately reflect your risk profile. You may want to consider actively making an investment choice – and adjusting it over time, as your circumstances change, if that’s appropriate – to make sure your money is working to your advantage over the long term.
More information
A financial planner can assist you with this, and can help you decide which of your super fund’s investment options are suitable for you now and over the course of your investing life. To contact a Mercer financial adviser, please call 1800 682 525.
1 Source: Securing Retirement Incomes, Mercer 2009
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
