Answering your questions about super and investing in 2009
The current falls in share markets around the world have had an impact on everyone, in many different ways. This year, we know many people will look at their - Why do falling house prices in Ohio mean falling super balances in Australia?
- Are we on the edge of a recovery?
- Who manages your super?
- Are you investing for growth and income?
- Retiring soon - what are my options?
- How can I make the super rules work for me?
Why do falling house prices in Ohio mean falling super balances in Australia?
One question many people have asked over the past 18 months is 'why does my super fall when the share markets fall – I don't even own shares?'
The answer is that many Australians do own shares, usually through super. These shares are all linked to the movement of financial market – so when the Australian share market goes up, it's likely your super balances will also go up. When share markets go down – as they have in the past year - it's likely your super balance will also go down.
Over the past eighteen months, share markets have gone down. The problems started when people in the US and parts of Europe took out low interest rate mortgages to buy new homes, thinking they’d be able to sell them for a profit in a few years. When interest rates started to rise, some home-owners found out they could no longer afford to pay their increasing mortgage payments and either put their house up for sale, or walked away from their home, their mortgage and their bank manager.
As more homes appeared on the market, the value of real estate tumbled. It soon became impossible for banks to sell these houses or recoup the money they lent to mortgage holders. And then the banks got into trouble, and stopped lending money to anyone. The global financial crisis grew from this situation – too many people borrowing too much money, without the ability to maintain their payments.
Companies who would normally rely on banks to fund their operations found that it was harder to borrow from the banks for expansion or support their business. And when companies struggle to support their business, they have to look for new ways to save money – like letting go of staff and cutting wages, or cutting back on production and expansion. This leads to higher unemployment, and when unemployment rises, we know that people start to get nervous, stop spending and start saving. And when people stop spending, companies stop making money, their profits fall and then their share prices follow.
That's pretty much what's happened over the past two years. When the global financial crisis started to unravel, financial markets around the world started to fall, bringing with them the value of shares – and the value of your super.
The good news? What goes down, should go up.
The good news is that although the recent falls have been severe, as professional investors we know that markets and economies all move in cycles growth – from boom periods to events like the global financial crisis. Think about previous recessions and market downturns – 1987, 1990, 2001. Each of these periods have been followed by long periods of sustained growth. Of course, the past performance of share markets isn't an accurate way of predicting what will happen in the future, but we can be reasonably certain that at some stage, markets should again recover.
The recent downturns of 1987, 1990, 1994 and 2002 have all been followed by a strong recovery
Major market events and the Australian share market
| Year | Event | Annual return % | Average return for next 5 years % |
|---|---|---|---|
| 1987 | Wall St Crash |
-7.9
|
+9.9
|
| 1990 | Keating recession 'we had to have' |
-7.5
|
+17.8
|
| 1994 | Bond Market Crash |
-8.7
|
+14.6
|
| 2002 | The 'Tech Wreck' |
-8.1
|
+21.1
|
| 2008 | Global recession |
-43.0
|
?
|
Source: S&P/ASX All Ordinaries Index to April 2000, S&P/ASX 300 Index from May 2000.
Past performance is not a reliable indicator of future performance.
Are we on the edge of a recovery?
History can tell us a lot about what might happen in the future.
Take a look at the chart below, which highlights market trends since 1970. The blue line shows periods when the market moved continuously in a positive direction – also known as a bull market. The red line indicates a bear market – or when the market moves continuously in a negative direction.
Based on historical data since 1970, the average bull market has lasted 42 months, while the average bear market has run for 15 months. The current bear market started in November 2007, which means markets have moved continuously in a negative direction for at least 15 months. Of course, you can't predict the future based on past performance, but it is possible that markets have hit the bottom and are on the edge of a recovery.
No one can predict for certain when the recovery will take place, but most early phases of the new bull market incorporate a period of sharp recovery.
Source: Bloomberg and Zurich Investments.
Market watch: keeping an eye on the signs of a recovery
As professional investors, we believe it's likely we've seen the bottom of the 'bear market' that started back in 2007.
Source: BT Financial Group, Premium Data.
Major international markets are also showing signs of a turnaround.
Source: BT Financial Group, Premium Data.
Who manages your super?
Many people don't know how much control they have over their super. In truth, how your super is invested depends on your decisions and the decisions of your fund manager and financial adviser (if you have one) acting on your behalf.
You:
Choose how your super is invested based on the different investment options offered within your super fund.
Investment professionals:
Invest your super across different types of asset classes - like shares, property, cash and bonds - depending on your investment choices.
A financial adviser can also help you choose the right investment options for you, based on your personal circumstances and financial goals.
The value of your super is also influenced by many different factors, including changes in Australian and international share markets, economic conditions and interest rates.
Are you investing for growth and income?
You're a long time retired – make sure you're investing for growth and income
According to the Australian Bureau of Statistics, we're hanging around for longer. Life expectancy for an Australian man is now around 78.5 years, while women can expect to live till they're 83. Stop working at 60 or 65 and, statistically speaking, you'll have a long time in retirement.
If you want to make sure your retirement savings to last as long as you do, it makes sense to get advice around balancing your retirement savings to generate an income and some growth. A financial adviser can help you get the right balance between secure investments, like cash, and more risky long-term growth investment to maximise your investment earnings over the long-term upon consideration of your circumstances, so that you can enjoy a more comfortable retirement.
Note: accumulated returns based on $1,000 invested in December 1984.
Source: A&P/ASX 300 Accumulation Index, MSCI World ex-Australia (net dividends) Index in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years Index, UBS Bank Bill 0+ year.
Past performance is not a reliable indicator of future performance.
The problems with cash
Cash definitely has a role to play in a portfolio, but over the long term it won’t provide you with the growth you need to maintain your investment value, and the lifestyle you want. Instead, it’s a good idea to protect your capital from taxation and inflation by investing some of your money in growth assets, like shares and property as well. Even if you’re close to retirement, you still have time for your growth assets to recover from the downturn
Retiring soon - what are my options?
If you were planning to stop work soon, the recent falls in financial markets may have your super in less than good shape. The next step you take will be a big factor in determining how close you come to having the retirement you were working towards. Here are some points to consider:
Seek professional advice
Regardless of market conditions, it makes sense to regularly review your investment strategy and make sure it is appropriate to your retirement savings goal and investment timeframe. A financial adviser can help you do this, as well as help you work out how much income you need through retirement and your plan to achieve it.
A financial adviser can also help you review the asset allocation of your portfolio, and ensure you're still comfortable with your tolerance to risk.
Consolidate your super accounts
Having more than one super account means you're paying more than one set of fees, something that can have a negative effect on your overall balance. To consolidate your super, get all your super statements together, sit down one day and complete your rollover forms.
The ATO 'superseeker' service can also help you track down any lost super. Before you consolidate your super, make sure you compare fees and insurance options.
Buy yourself some time – keep working
Putting off the day you stop earning and start spending your super means you buy yourself time – time for the markets and your super balance to recover. And with the markets expected to recover by the end of 2010, it may be worthwhile waiting until your super balance has had a chance to benefit from this inevitable recovery.
Delaying your retirement gives you two other potential advantages: you can delay drawing down on your super, and you can add more to your super through ongoing contributions.
Save now, spend later
Adjusting your short-term spending might also have big advantages down the track. This could mean delaying big expenditure items such as house renovations, an overseas trip, or an upgrade to the family car. Instead, think about moving this money into super’s generally tax-effective environment, and you'll be creating the opportunity for it to grow and earn investment returns when financial markets do recover.
Consider a Transition to Retirement strategy
If you're 55 or older, the ATO has special Transition to Retirement super rules that allow you to increase your super without reducing your take-home pay. It works like a typical 'salary sacrifice' arrangement, but you can immediately redraw some of this money in the form of pension to top-up your reduced income, without having to pay more tax.
This gives you two important benefits. You can invest more money into your super without affecting your take-home pay, and the lower tax rate paid on your contributions means you'll be putting a lot more into your super than you take out. This creates the potential to grow your balance much faster than if you simply rely on your compulsory 9% employer contributions.
How can I make the super rules work for me?
Take advantage of the Government Co-contribution
A few years ago, the Government realised many Australians weren't going to have enough super to live a comfortable standard of living when they retired. To try and help, they introduced the Super Co-Contribution scheme. If you qualify, it's an easy way to give your super balance a boost.
Depending on how much you're earning and subject to meeting certain eligibility criteria, by making extra payments into your super, the Government will kick in some money too.
For every additional $1 of personal after-tax money you deposit into your super account before June 30 this year, the Government could contribute up to $1.50 – up to a maximum of $1,500pa. From July 1, 2009 the maximum Government contribution is reduced to $1.00 (that’s a maximum of $1 from the Government for every after-tax dollar you invest), up to a maximum of $1,000pa. So if you have spare cash, it’s well worth considering depositing extra money into your super as small amounts can make a big difference to your super in the long-term. Here’s how it works:
Before 30 June, if you earn less than $30,342 per year
The Australian Government will contribute $1.50 for every extra dollar of after-tax money you put into your super – up to a maximum of $1,500 a year. That’s a 150% return on your money.
From 1 July, if you earn less than $30,342 per year
The Australian Government will contribute $1.00 for every extra dollar of after-tax money you put into your super – up to a maximum of $1,000 a year. That’s a 100% return on your money.
If you earn more than $30,342 per year
The Government Co-Contribution is gradually reduced, and cuts out once your earn over $60,342 a year.
Don't forget your life insurance
Did you know?
- There's a $1.3 billion gap between the life cover Australians have and what hey actually need1.
- There is a one in three chance you will need to be off work for three months due to illness of injury before you turn 652.
Why do I need it?
Most people don't think twice about insuring their car, home and valuables. But if your ability to work is your major source of income, it's just as important to protect you and your family so you're covered in the event something happens to you.
The smarter way to get cover
If you haven't already done so, taking out pre-approved Life Insurance and Totally & Permanent Disability (TPD) insurance through your super account could make a lot of sense. There may be tax advantages in it for you and it's easy to set up.
Rather than use your after-tax earnings to pay your premiums, if you have insurance through your super fund, your premiums are deducted from your super balance. This means you won't notice a difference to your take-home pay. Even better, you and your family will be financially protected should something ever happen to you.
1. Investment and Financial Services Association (IFSA), Insurance Fast Facts, October 2005.
2. Institute of Actuaries of Australia, 2000: Interim Report of Disability Committee.
