Why your superannuation savings will shrink, and what you can do

A decade of growth in superannuation fund returns has many Australians sitting pretty. But investment markets will eventually get ugly, but you can stop your money going backwards.

Nobody wants their wealth to go backwards, but that’s exactly what superannuation fund members across Australia are going to face.

The big question for Australians’ combined $2.8 trillion nest egg is when it will happen.

Figures released last week by superannuation research group Chant West showed that super fund returns had delivered a record-breaking tenth consecutive financial year of growth.

Anyone who joined the workforce in the past decade is unlikely to have ever experienced negative returns. Those of us with longer memories remember the global financial crisis, when super funds reversed for two years in a row.

Money specialists say most average super fund members should expect a negative annual return once every five-to-seven years, so 10 years in the black in highly unusual.

Nest eggs do get smaller from time to time.

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Chant West says many asset sectors held within super funds “look fully valued or close to it”, and warns that challenging times ahead are expected.

However, switching all your super to cash or another conservative option right now is unlikely to be a good long-term move.

Many Aussies found out the hard way during the GFC when they sold out of higher-growth assets — such as shares — right at the bottom of the market in March 2009, only to miss out on the strong bounce-back that followed.

Nobody knows when financial markets will fall, and for how long they will slump, and anyone trying to pick it usually comes unstuck.

Late last year sharemarkets were suffering but since then, Aussie stocks are up 21 per cent, US stocks are up 28 per cent, and anyone who sold out during that downturn is rather annoyed with themselves.

Over the past 15 years, high-growth super funds have average 7.7 per cent annual returns — even factoring in the GFC — while conservative funds averaged 5.8 per cent.

Most people’s super will lose value when financial market tumble. Here are a few ways to handle it:

CONSIDER LIFECYCLE FUNDS

This increasingly popular super option sees your savings automatically invested based on your age. For example, if you were born between the 1970s and 1990s more than 85 per cent of your money sits in higher-growth assets. But if you were born in the 1940s or 1950s only 40-45 per cent is invested in growth. This strategy reduces the risk of a GFC-like fall smashing people nearing retirement.

IT’S TIME TO BUY

Most workers have many years before they can access their super, which means time is on their side to ride out the ups and downs. When markets are down, their compulsory employer payments still get deposited and are buying good investments at discounted prices. Commonwealth Bank shares were below $27 in March 2009 and today they’re above $80.

MULTIPLY TAX BENEFITS

When prices fall, it’s a good time to get extra cash into super to grab those bargain buys. There are plenty of government incentives to help you do it, including greater flexibility to make extra tax-deductible contributions and the co-contribution scheme for lower income earners that puts up to $500 a year into the fund of someone who puts in $1000 of their own cash.

@keanemoney