We all know that it is essential to save for our retirement
and superannuation has become one of the main products to do just that .
So for years we contribute to super, yes there are many smart ways to speed up the process of growing your super
by using smart contributions and those will be different for each person at a different point in time.
In my pretty comprehensive by now video library you can learn about Salary Sacrifice, Downsizer the Contributions,
Concessional Contributions and Used Super Contribution so-called Catch-up Carry Forward Contributions,
End of Financial Year Smart Contributions and many more videos explaining different topics
relating to savings and investing in super.
There are various factors that will affect the outcome of your superannuation balance at the retirement stage
Number one, Amount of Money Contributed
The more money you invested, the better the outcome.
Number two, types of contributions made.
How much tax has been deducted over the years, the less tax we've drawn the better your outcome
Number three, Time spent within the investment environment
This is the magic of compound interest
Number four, Any withdrawals made. Well have you withdrawn any money during COVID?
If yes, there is still time to pay it back to your Super Fund.
Number five, Fees Paid.
That is very important, but not as much as the government
Although super fund ads on TV make you think, this is very easy marketing.
By the way who do you think pays for all those tv ads run by Big Super Fund? Well, you do.
And number six, well one of the most important factors are Investment Returns.
So today, we will discuss this most important and not really fully explained aspect of investment returns
that will impact your retirement outcome like nothing else ever will.
My name is Katherine Isbrandt from About Retirement, I'm Certified Financial Planner
and you are watching About Retirement TV, the place to learn all you need to know
how to be financially ready for your retirement or how to improve your retirement if you are already there.
Earl Nightingale said “As in all successful ventures, the foundation of a good retirement is planning.”
And your good planning should include good investment planning as well.
Investing is a little bit like climbing the mountains we have periods of very good returns
and we are climbing our mountain.
Then there are periods when market is flat. Well, at least it is comfortable walking, no big stress.
But then, we experience periods that feel like falling, as long as you don't panic
and you don't do silly things - like selling off your investments after a bit of market fall, well, off we go up again.
Until one day we are right on the top of that mountain and this is the time when we are ready to retire.
But that climbing journey can be a different experience and a different outcome for every single person
Why? Well as I mentioned before, one of the major factors that impact the outcome of your retirement portfolio are returns.
specifically the order in which the returns have been received
so called "investment sequencing risk".
And this is when I question the whole advertising of the "fantastic average returns" run by superannuation funds on TV.
Well to prove my point, let's compare, Margaret and Jane.
Both have a starting super balance of $200,000 at the age of 55
Both contribute to superannuation $25,000 every year
Both run that superannuation till the age of 65
And both received an average return of 7.2% per anum.
and for the purpose of this exercise, I disregard the superannuation tax.
So both ladies contributed the same money and received the same average annual return
However, they started at the different point in time, therefore, every year their returns vary
So again as you can see both women had an average return of 7.2%
and yet Jane ended up with over $92,000 less in her final superannuation balance
So as you can see the average return is not a solid indicator of what you can expect to have after many years of savings.
Bottom line is that “sequencing risk” is the risk of ending up with less money
that you originally calculated you might have at your retirement stage.
So what option do you have at that point in time?
Well you can take on even more risk to make up for those losses
or you can change your retirement plans and retire later
or you can accept the fact that you have less money now and just retire on a lower income
or otherwise you accept the fact that you might run out of money
Another option is control investment risk better
at the end of the day the last thing you want is to end up with this picture, we don't want to fall off the cliff.
Instead, it is much more pleasurable and safer to be slowly walking off the mountain:
So what we are trying to do now is, introduce smooth, predictable, secure, solid
and predetermined levels of income, as well as capital returns.
Managing an investment risk is a sure way to prolong life of your savings, your income and your capital.
So how do we deal with investment risk? Well, you have to make sure that your portfolio is really well diversified
Diversification between asset classes really helps reduce the volatility of returns
and especially impact of market falls. You can use conservative assumptions when forecasting -
if you know that in order to get your outcome that you need, you require a return of 8%,
prepare yourself for a more conservative return say 7% or even 6% and you will not be disappointed,
you can prepare yourself better, you can always add more money.
If the market surprises you with a better outcome, that is just a huge plus, sort of cream on a cake.
You can invest into assets that not only grow in value, but also provide a good level of income
reliable income I mean, such as property, shares, especially Aussie shares.
I don’t mean to disregard other asset classes, remember Rule No 1 – Diversification,
but in investing growth is the part that is volatile and unpredictable.
Income is usually part of the investment you can rely on, and is more stable and much more predictable.
Also you can invest portion of your money into conservative assets to reduce volatility
and limit impact of negative returns.
you can rebalance your portfolio when the market presents correct opportunities.
You can introduce a market fall “floor” to your investment strategy,
so you know in advance the worst case scenario
and your savings will never drop below what you are willing to accept as investment risk
You can keep your next year income in cash or just simply you can speak to financial planner
that has access to many products that can really assist you with controlling investment sequencing risk
We can set up a secure reliable and predictable income stream.
We can minimize impact of negative returns on your portfolio by introducing limits negative returns “floor”
return guarantees, that no matter how badly the market drops, your portfolio will not be part of it.
it so with our risk mitigation strategy we are trying to minimize market falls minimize impact it will have on your portfolio
so virtually this is what we are trying to achieve
Introducing Anne, the third lady with exactly the same type of investments
and exactly the same average annual return of 7.2% and yet Anne's outcome is $857,218.
Anne’s outcome is $22,312 better off than Margaret’s and a whopping $114,329 better than Jane’s
Obviously the higher that return the better the outcome, but the main idea is to control the sequencing risk,
so you don't end up with huge losses just before you retire
as it is very difficult indeed to recover such losses, once you are in the retirement phase.
The idea of a good investment planning is to introduce different investment instruments that as an overall return,
provide with this smooth and reliable rate of return, income and capital, without the feeling of falling off the cliff,
but rather an enjoyable and comfortable walking off the mountain
Therefore, unlike what super funds would like you to believe, transferring ALL your superannuation savings
from the accumulations account to an allocated pension, or account-based pension is most certainly not the way to go,
as you continue exposing your total entire retirement savings to ongoing sequencing risk of market volatility
That is one of worse possible choices you could make, as it really creates a highly probable risk of running out of money.
If you enjoyed this video and found it of benefit, please LIKE it and SUBSCRIBE to my channel.
Also visit my website AboutRetirement.com.au
where you will find lots of additional information all about preparing for retirement
and the actual retirement if you are already there.
And while you're visiting my website sign up to my newsletter to be updated with any financial details
that might affect your retirement
and now I would like to invite you to watch those videos
that explain different ways of contributing to super, benefits,
negatives and all the rules you have to meet to be eligible.
The second recommendation is my video
Investing for Income & Growth in Retirement.
Enjoy and I will be speaking with you in my next video, bye.