The intention of this information is to provide clarity around different terms that are used in the context of superannuation performance or superannuation investment performance. These are terms that our clients often ask us.
Australian super performance refers to the increase in value that Australian super funds generate for their investors over time, and it takes into account investment returns and taxes. This is usually broken into time periods of 1 year, 3 years, 5 years and 10 years.
We see our clients often wanting to understand their Australian super performance year to date, which is the increase in value of their super fund portfolio in the financial year. That is from 1 July to the current date. It is a way of seeing how your portfolio is going or performing. Do you know your Australian super performance year to date?
Other terms that are relevant to understanding your superannuation
Australian super fund performance tends to refer to the increase in value that a particular Australian super fund has generated for its investors over time, and it takes into account investment returns and taxes. However, as we explain below there may be different risk profiles being offered or managed in a given superannuation fund.
Australian super investment performance tends to focus on the underlying performance of the investments in a client or investor’s portfolio. This performance varies from fund to fund but also the risk profile of the client, which determines the types of investments that the client or investor holds in their portfolio.
What is a risk profile?
A risk profile is a categorisation of the level of risk that you are prepared to hold or able to withstand. All investments have an element of risk and that level of risk varies depending on the investment. For instance, Australian government bonds are considered to be the least risky investment for an Australian because the government has taxing powers and is able to pay investors interest and their principal by issuing Australian currency if need be. Investments in shares are more risky because they are not backed by the Australian government.
Risk is defined as the volatility in the returns on the capital in your superannuation account or the probability or possibility of the loss of your capital. Some investment experts refer to it as the probability of the permanent loss of capital.
An Australian super fund will ask you to select your risk profile or preferred risk profile or your risk profile can be determined with the assistance of a financial adviser.
Contact Setch today to assist you to determine the right risk profile for you.
How does your risk profile impact the investments in your superannuation account?
Your risk profile will generally determine the proportion of defensive versus growth assets in your portfolio. Defensive assets usually refer to bonds (or debt instruments) issued by the government or corporations and they are generally viewed as having lower risk or lower potential return volatility. Growth assets tend to refer to investments in shares, property, infrastructure and alternative assets and these tend to have higher risk than defensive assets.
The higher your preparedness to take on risk the higher the proportion of growth assets (and the lower proportion of defensive assets) in your portfolio, and the lower your preparedness to take on risk the lower the proportion of growth assets (and the higher the proportion of defensive assets) in your portfolio.
Risk profile categorisation
There are a number of different types of risk profiles but a common type of risk profile, but by no means the only one, is a balanced risk profile. This means that you have a similar proportion of growth and defensive assets. Our clients will often enquire of us what is their australian super-balanced performance, which means that they know that they have a balanced risk profile and they want to understand what their performance has been. Do you know your risk profile and your Australian super fund performance?
Contact Setch today to assist you to understand you risk profile and Australian super investment performance.
Why is it important for me to have advice on my risk profile and what is its impact on my Australian super investment performance?
The higher your risk profile categorisation, that is your preparedness to take on risk, the higher that your potential return on your Australian superannuation account will likely be over time. However, with that higher potential return comes risk such as volatility or the potential for a negative return in a given year. As such a higher risk profile can result in higher returns over time but it also brings more risk.
Your personal circumstances, including your family situation, age and attitude to risk are some of the factors that determine the right risk profile for you. A financial advisor can help you determine the right risk profile for you, which they will do using various methodologies including a risk profiling tool.
It will have an important impact on your Australian super investment performance. The higher the risk profile the higher the likelihood of higher returns over time, but also the higher the volatility. Accordingly, your risk profile is personal and involves a trade off that is best undertaken with professional advice from a financial adviser.
For instance, for a younger client a higher risk profile may be appropriate because of the number of years they have in the market to recover from a negative return, whereas the opposite is true for an older investor.
We provide the following background to explain its importance to Australian super performance.
The median life expectancy for women in Australia is about 86 years old and for men it is 83 years old. This is the median life expectancy, which means that half the cohort will live beyond that age. The median retirement age for Australians is below 60 years, which means that many Australians will have the good fortune of a long retirement. However, that long retirement needs to be funded when they are no longer working.
How will Australians’ retirement be funded?
Australians are not eligible for the aged pension until they reach 67 years old. Complicating this issue is that for a couple, Centrelink typically takes into account the joint income of the couple in calculating the aged pension for a person that is retired. This means that if one person within the couple retires but the other person does not then Centrelink may not (and is unlikely to) pay the aged pension to the person who has retired due to the level of the joint income of the couple (depending on the income of the person that is continuing to work).
This means that for many people whether single or a couple, there is likely to be a period prior to eligibility for (or payment of) the aged pension, where they are funding their retirement. This period needs to be funded by the person’s superannuation, investments and personal savings.
Even if a person works until 67 years old or beyond, which is also common, they will likely be relying on their superannuation account for a comfortable retirement. They may receive a whole or part aged pension for the whole or part of their retirement but it is likely to be supplemented by their superannuation to provide for a comfortable retirement.
The above does not cover all the intricacies and nuances to the aged pension and how Centrelink considers eligibility and the calculation of your entitlement. Understanding and developing strategies that bring together our client’s superannuation and entitlement to the aged pension is an expertise at Setch, which turns the dial for our clients.
Relationship to Australian super performance
The balance of a person’s superannuation account depends on employer contributions, salary sacrifice, personal contributions, years in the fund and Australian super performance. Depending on the person’s circumstances, their Australian super performance forms a material part of their superannuation account balance. Accordingly, Australian super performance is important to each Australian as to whether they will have a modest, comfortable or very comfortable retirement.
Receiving financial advice about your personal circumstances and your financial goals and objectives in retirement including how Australian super performance will impact your situation is important.
Contact Setch today to assist you to understand how Australian super performance impacts your retirement and retirement goals.