Superannuation shrinks: why this may be good for your nest egg

Australians’ nest eggs have been cracked by heavy falls in share prices and other assets, but for some this is an opportunity.

Nest eggs may appear cracked at the moment, but they will bounce back.

Superannuation is being smashed by a tsunami of selling on stockmarkets in Australia and overseas that looks likely to wipe at least 5 per cent off many people’s nest eggs this financial year.

With just one week until June 30, super is heading towards its worst performance since the global financial crisis in 2008 and 2009.

About half of a typical balanced super fund option sits in Australian and US shares, which are down 11 per cent and 13 per cent respectively since July 1 2021, while the rest is invested in assets including property, infrastructure, bonds and cash – which haven’t gone well either.

However, this weakness is not always a bad thing, and should be put into perspective.

For starters, balanced super funds surged an average 18 per cent last financial year, so we’re still in front over two years.

And, importantly, falling stockmarkets deliver bargains – quality investments that are the same strong companies they were a year ago, except that their share price is now discounted by 10 per cent or more.

Aussie nest eggs are taking a beating but the weakness should be put into perspective.

Investment advisers often recommend averaging into assets over time, perhaps with a fresh deposit every few months, to help people ride out market volatility by avoiding going all-in at peak prices.

Your super fund does this automatically, courtesy of compulsory employer contributions and potentially your own salary sacrifice and voluntary contributions being deposited regularly.

The timing of the market fall could be good because many Aussies are considering pumping extra money into super before June 30 to claim a tax deduction.

Of course, shares could fall further this year and many analysts expect that, but you’re now getting more assets for each dollar pumped into super than a year ago.

Superannuation is still the one for maximising tax benefits on your life savings. Apart from tax deductions for contributions of up to $27,500 each year into your super, there is a low 15 per cent tax rate while the nest egg is growing, and then no tax in retirement.

Markets will change, but the tax breaks remain.

Despite the current weakness, it’s important not to press the panic button and switch your super to the safety of cash.

People who have done this historically have ended up worse off financially than those who rode out the storm.

Industry Super Australia has analysed the impact of locking in losses based the previous bout of pain – when super was stung in the early days of the pandemic in 2020 and many members switched to safe cash-only options.

It says someone with $50,000 in super who switched to cash in 2020 locked in losses of up to $20,000 by missing the rebound, and potentially cost themselves $60,000-$70,000 by retirement.

“It’s understandable to be concerned about the economy and the prospect of lower super fund returns, but it’s important to remember that super is a long-term investment, and that markets have a habit of recovering,” Industry Super Australia chief executive Bernie Dean says.

Originally published as Superannuation shrinks: why this may be good for your nest egg