Investing through different life stages – what you need to know

Time in the market not timing the market.

There is a well-known adage when it comes to reaping the rewards of super, which is time in the market, not timing the market. In other words, to make money, stay invested for as long as you can, and try not to worry about knowing when the ‘best’ time is to invest.

Understanding the nature of the markets

To understand what time in the market, not timing the market means, it's worth briefly addressing the nature of the markets.

Short-term market volatility generally resulting from events like the 2008 GFC, and the more recent 2020 stock market crash (COVID-19), is unpredictable. And, trying to second-guess when the markets may thrive or dive, is next to impossible without perhaps a crystal ball.

Long-term market movements on the other hand, tend to be more reliable, and to an extent, predictable.

Although of course the past can’t indicate what will happen in the future, over the past 50 years, bear markets (when markets are down) have been known to run their course relatively quickly, and have been succeeded by sustainable bull markets1 (when markets are up), making long-term investing an attractive strategy, as illustrated in the graph below.

The line graph titled "Australian All Ords Bull and Bear Markets July 2020" shows how markets behave over time in cycles, with Bull markets having a longer duration than Bear markets. The chart highlights recent major events: A 152 month Bull market prior to the Global Financial Crisis (GFC) from 1995 to 2008, the 15 month Bear market during the GFC from 2008 to 2009, which was then followed by a 130 month Bull market from 2009 to 2020, and most recently the current 6 month Bear market as a result of the COVID-19 pandemic.
Average Bull Length: 70 months. Average Bear Length: 14 months. Average Bull %: 165%. Average Bear %: -34%. Please note: Bear market defined by price decline of more than 20% from the peak. Month end prices have been used for the calculations. Source: Bloomberg/BTIS.

So, although it sounds counter-intuitive, chasing short-term returns for your super may not always be as sound as considering the long-term potential of your super investment which, could end up being decades long, as you can see in the table below.

(And yes, it is possible to still earn investment returns when you’ve retired!)

How long could your super be invested?*

Phase Age Years
Pre-retirement 17 - 66 49
Retirement 67 - 97 30
  TOTAL = 79

*The Australian Bureau of Statistics (ABS) forecasts life expectancy based on population death patterns over three-year periods. If you were born in 2001, you’re forecast to live until the age of 77 if you’re male, and 82 if you’re female. However, if you reach the age of 65, you can expect to live until 94 if you’re male, and 97 if you’re female.2

Read more about Why superannuation is a long-term investment.

The magic of compounding

The attraction of super being a long-term investment (versus trying to time the market) largely comes down to the fact that the earnings you accrue on your super balance every day, continue to grow over time.

And this is thanks to the model of compound interest, which Einstein is said to have called “the greatest mathematical discovery of all time”, and “the eighth wonder of the world.”3

Compound interest is where interest is earned on an initial amount over a specified period of time, then at the end of that period, those earnings plus the initial amount are added together, which in turn, earn interest during the next period, and so on. This is typically how interest on a savings account will be calculated.

Compound interest, in the words of Benjamin Franklin, is when “money makes money, and the money that money makes, also makes money.”4

Here’s an example that we put together using ASIC’s moneysmart Compound interest calculator.

Let’s say Jack invests $5,000 in a savings account at a return of 4% p.a. After 10 years, compounding annually, he would have $7,401. That is $5,000 of his own money and $2,401 of total interest.

This story starts becoming interesting when you take advantage of the twin benefits of compound interest, which are regularly adding money, and investing for longer.

Adding money

Using the same example above, where Jack invests $5,000 in a savings account at a return of 4% p.a., but this time he also contributes $1,000 a year, for 10 years. With returns compounding annually, the final figure would be $19,407, made up of $15,000 of Jack’s own money, and $4,407 in total interest.

Adding money, and time

When we add in the variable of time, this is what happens.

Again, let’s say Jack invests $5,000 in a savings account at a return of 4% p.a. He also contributes $1,000 a year, this time for 25 years. With returns compounding annually, the final figure would be $54,975, which is more than an 80% increase on his own $30,000 that he invested over 25 years.

If Jack then stopped adding to this, and left his investment of $54,975 to earn compound interest at the same rate of return for another 20 years, he’d see this final figure come to around $120,457, which is an increase of over 300% on his own $30,000 investment.

The differences in the amounts in these examples are due to time the money is invested, the contributions made, and the earnings compounding. As you can see, the earlier you start, the more you can benefit from it.

We calculated the above example on 21 August 2020, using a 4% p.a. interest rate and using the calculator’s default assumptions. Try your own examples using ASIC’s moneysmart Compound interest calculator.

So how does compounding work with superannuation?

Superannuation works a little differently to a regular savings account, firstly because the investment is intended to span decades, possibly up to 70 – 80 years, secondly, because contributions happen at different rates and are generally different amounts over time, and lastly, the rate of annual return is unlikely to be uniform over the entire period of your super investment due to the earning nature of your underlying assets and of course, market movements.

You can read about Understanding super returns if you want more detail.

Your super earnings do however follow the same principle as compound interest, and this is how.

Your super is usually invested in a variety of assets like property, shares, cash, and fixed interest, each of which would yield a different return at any given year. They then average out to give you an overall annual rate of return.

In certain years, the returns on some of your assets may be negative and others positive, or you might have consecutive years where all the assets earn only positive returns, or conversely, during turbulent market times, negative returns.

Whichever way, it’s anticipated that over the course of your life, there’ll be more years of positive returns than negative ones, and the aggregated returns will compound each year, likely resulting in a balance at retirement that is more than you contribute throughout your working life.

We’ve broken this down for you with some hypothetical examples. Read on below.

Investing in your twenties

If you’re in your twenties, and you’re earning more than $450 (pre-tax) each month, your employer will also pay 9.5% of your salary into your super – called Superannuation Guarantee (SG). Over time, your super will compound its earnings to help your retirement savings grow.

And, if you have 30 to 40 years until retirement, you have an investing asset that money simply can’t buy – time. And the more time you have, the longer you have to ride out periods of market volatility and grow your super with the power of compounding.

Compounding is one of the fundamental concepts of building wealth over the long term. Apart from the tax savings, it is the key driver behind superannuation and why many financial experts tell us it is the best investment vehicle for our retirement savings.

If you’re in your 20s, you can use it to do incredible things to your super balance that simply aren’t possible for people who are older.

Consider the following examples.*

Scenario one.

  • At the age of 21, Reha has around $6,542 in her super which is the average at this age.5 Over the next 44 years until the age of 65 when she decides to retire, Reha relies on her employer’s 9.5% SG contributions to build her super balance. Let’s say she’s earning the Australian average of $67,012 a year throughout these years.6

It’s worth noting that for a “comfortable” retirement, the lump sum estimates for a retirement super balance are $545,000 for a single person at 65, and this assumes they’ve cleared their debt and also receive in part, the age pension.7

Now imagine this second scenario.

  • Reha decides that in addition to the 9.5% SG contributions that her employer makes, that she’ll also add an extra 5.5% p.a. of before tax contributions ‘(salary sacrifice)’ to her super each year, rounding it up to 15%. 

And finally, a third scenario.

  • Fast-forward to Reha at 45 years old, with a super balance of around $104,648, (currently the average for someone her age and gender8.) She still earns $67,012 a year, and decides to play ‘catch-up’ with her super for the next 20 years by contributing before tax money to her super each year until 65.

So, which is the more ideal scenario?

  • For the first scenario where Reha relies on her SG contributions, her super balance at 65 is approximately $492,867. In this scenario, Reha would fall significantly short of a “comfortable retirement” balance. 
  • For the second scenario where Reha adds some extra funds over the course of her working life, the difference is substantial. Reha would end up retiring at 65 with around $723,908 in super, and enough to live “comfortably”.
  • For the third, 'catch-up' scenario, Reha would have to contribute an additional $9,900 per year for 20 years on top of the employer contributions that she receives, to get her to $545,837, around the figure of the “comfortable retirement” lump sum of around $545,000.

The differences in the amounts in these examples are due to time in the market and earnings compounding. The earlier you start, the more you can benefit from it. But if you start later, you may need to contribute a lot more, just to reach the same level.

*No two situations are ever likely to be the same, given the variables of things like time, contribution amounts, and rates of return against the varying underlying assets. So, these scenarios are hypothetical and should only be used for illustrative purposes. If you want to, you could try ASIC’s moneysmart Superannuation calculator with different salary levels and contribution levels to see what could be possible. It’s what we used when we put together these examples, using the calculator’s default assumptions, on 21 August 2020.

Get compounding to work harder for your super

Here are some ways that you can take advantage of compounding to grow your super. These ideas are for consideration – we encourage you to seek independent financial advice about the risks and potential benefits of these strategies before acting on any of them.

And be sure to take into consideration your superannuation contribution caps, and read your Product Disclosure Statement to understand any fees that may apply.

  • Consolidating your super into one account – the money you save in multiple fees could stay invested and really help grow your overall super balance.
  • Adding more to your super (if you can) – by adding more money to your account each year – above the 9.5% you normally receive from your employer – you’ll give your super the opportunity to grow faster and bigger.
  • Have the government kick in for you – if you qualify, the Government Co-Contribution scheme will see the Government contribute $1.00 for every after-tax dollar you put in up to a maximum of $500. That’s a 100% return on your money.9
  • Understanding your investments – when you’re younger, you can generally afford to take on more ‘investment risk’ with higher-risk growth assets like shares and property. By doing this, you’re giving yourself a greater chance of higher long-term returns. Note however that the downside to this is that growth assets frequently change in price, so you’ll see more ups and downs in the value of your super investment in the short-term.

If you can’t remember making an investment decision, chances are you were automatically put into either the BT Lifestage investment option within BT Super, BT Super for Life, or BT Super for Life Westpac Group Plan, or the Asgard MySuper Lifestage Investment Option within the Asgard Employee Super Account. The Lifestage investment option manages the investments for you, and automatically changes over time as you get closer to retirement.

You can read more about Lifestage investing here.

Investing in your thirties and forties

When you’re in your 30s and 40s, you’re likely to be in a better position than you were in your 20s to bolster your super balance before retirement rolls around as you may be earning a higher salary.

Chances are you probably won’t be thinking about finishing work for a while yet. So, by taking a few simple steps right now, you’ll be able to get on with your life – knowing your super can take advantage of compounding and end up in better shape when you decide to access it.

Compounding in super in action

Consider the following hypothetical example*, where Jeremy’s target super balance at retirement is at minimum the $545,000 at the age of 65, that the Association of Superannuation Funds of Australia (AFSA)10 defines as a “comfortable retirement” lump sum.

Scenario one.

At 45, Jeremy has $144,216 in his super account, which is the average balance at this age.11 He’s earning the average Australian wage of $67,012 a year12, and his employer is contributing 9.5% SG into his super until he turns 65.

Scenario two.

In this second scenario, Jeremy adds $600 a month (pre-tax) into his super, on top of his SG payments.

Scenario three.

In this third scenario, Jeremy, in addition to adding $600 a month (pre-tax) on top of his SG payments, holds off and retires at 70 instead of 65.

Scenario four.

In this final, forth scenario, we wind back the clock to Jeremy being 30, with a super balance of $46,974, which is around the average balance at this age.13 He has the foresight to add $600 a month (pre-tax) on top of his SG payments, and retires at 70.

How do these situations play out?

  • In the first scenario, relying only on SG contributions, Jeremy, with $144,216 at 45 will end up with around $387,406 in super at 65.
  • In the second scenario, where Jeremy adds $600 a month pre-tax (or around $138 a week) into his super from the age of 45, he will end up with around $546,856.
  • In the third scenario, where Jeremy adds $600 a month pre-tax (or around $138 a week) and retires at 70, his final super balance would be around $673,117.
  • In the fourth scenario, if Jeremy started monthly contributions at the age of 30 of $600, by the time retirement at 70 comes around, he’d be looking at around $914,545 in super.

As you can see, if you can top up your super as you build your career, it has the potential to grow bigger – often with less effort. But if you start much later, you will need to contribute a lot more, just to reach the same level.

*No two situations are ever likely to be the same, given the variables of things like time, contribution amounts, and rates of return against the varying underlying assets. So, these scenarios are hypothetical and should only be used for illustrative purposes. If you want to, you could try ASIC’s moneysmart Superannuation calculator with different salary levels and contribution levels to see what could be possible. It’s what we used when we put together these examples, using the calculator’s default assumptions, on 21 August 2020.

Get compounding to work harder for your super

Here are some ways that you can take advantage of compounding to grow your super. These ideas are for consideration – we encourage you to seek independent financial advice about the risks and potential benefits of these strategies before acting on any of them.

Be sure to take into consideration your superannuation contribution caps, and read your Product Disclosure Statement to understand any fees that may apply.

  • Consolidating your super into one account – If you’ve had several jobs in your career (or even several careers!) then transferring all your super accounts into one consolidated fund, could potentially reduce the amount of fees you’re paying, and ensure the compounding returns are concentrated in one place.
  • Adding more to your super (if you can) – Salary sacrifice is a frequently used strategy to accelerate retirement savings, as it invests before-tax dollars into super. Contributions within the allowable limits are taxed at just 15%, significantly less than the 47% tax rate (45% plus Medicare levy of 2%) that you may pay on your gross income. You can also contribute post-tax money and claim a tax deduction on those contributions. Just be sure you check your contributions caps.
  • Understanding your investments – if you still have several decades left of working, you can generally afford to take on more ‘investment risk’ with higher-risk growth assets like shares and property. By doing this, you’re giving yourself a greater chance of higher long-term returns. The downside is that growth assets frequently change in price, so you’ll see more ups and downs in the value of your super investment in the short-term. Keep in mind however that over the long term, higher-risk growth assets have always outperformed cash.

If you can’t remember making an investment decision, chances are you were automatically put into either the BT Lifestage investment option within BT Super, BT Super for Life, or BT Super for Life Westpac Group Plan, or the Asgard MySuper Lifestage Investment Option within the Asgard Employee Super Account. The Lifestage investment option manages the investments for you.

And remember you can always change your investment options whenever you wish.

You can read more about Lifestage investing here.

Investing in your fifties and sixties

When you’re in your 50s and 60s chances are, you could be worried about the impact of the financial climate on your investments, including your super. You’re hopefully going to be a long time retired, so ensuring you’re invested for both growth and income is an important consideration.

The problem with cash

Cash definitely has a role to play, but over the long term it’s unlikely to provide you with the growth you need to maintain your investment value, and the lifestyle you want.

It’s a good idea to protect your capital from inflation by investing some of your money in growth assets, like shares and property as well.

If you can’t remember making an investment decision, chances are you were automatically put into either the BT Lifestage investment option within BT Super, BT Super for Life, or BT Super for Life Westpac Group Plan, or the Asgard MySuper Lifestage Investment Option within the Asgard Employee Super Account. The Lifestage investment option manages the investments for you.

Remember you can always change your investment options whenever you wish.

You can read more about Lifestage investing here.

Retiring soon? What to consider

Here are some ideas for consideration – we encourage you to seek independent financial advice about the risks and potential benefits of these strategies before acting on any of them.

Be sure to take into consideration your superannuation contribution caps, and read your Product Disclosure Statement to understand any fees that may apply.

  • 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. (Before you consolidate your super, make sure you compare fees and insurance options.)
  • Buy yourself some time – keep working, even if it’s only part-time – 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 benefit from the power of compounding.
  • Put some more away with the bring forward rule – the government lets people getting close to retirement to put more into their super. Depending on your account balance, if you’re under 65 you can effectively bring forward your non-concessional superannuation contribution caps from a three-year period and use them over a shorter period. This means you could contribute up to $300,000 into your super in one financial year, and pay no extra tax.
  • Consider a Transition to Retirement strategy – if you’re 55 or older, there are 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 a pension to top-up your reduced income, without having to pay more tax. Be sure you check the preservation rules on accessing your super.
  • Check in to see how your super is invested – remembering the 10/30/60 Rule14, which suggests that the income you end up having in retirement generally comes from the three following areas:
    - 10% from the money you’ve saved up during your working life.
    - 30% from the returns you earn on your investment before you retire.
    - 60% from the returns you earn on your investment during retirement.

In practical terms, this means it’s worth thinking about your super’s investment strategy to help ensure it’ll generate returns throughout your retirement.

Here’s an example*

After earning the average Australian salary of $67,01215, Jeremy retires with around $914,545 at the age of 70 by contributing $600 a month to super, in addition to his SG payments from the age of 30 (where his super balance was $46,974, around the average balance at this age.)16 For a comfortable retirement, he needs around $43,687 a year for annual living costs.17

For the first year of retirement he takes out this amount as a super income stream – often called an account-based pension. Then the balance of $870,858 remains invested.

After 12 months, this $870,858 increases to around $902,347 just from remaining reinvested, meaning Jeremy would still earn around $31,489 in one year on the super that remains, which in the first year of retirement is around 73% of his income stream for that year. For subsequent years, the same concept applies – keeping the balance of his super invested once the super income stream has come out, so he can earn returns that can generate him an income.

*No two situations are ever likely to be the same, given the variables of things like time, contribution amounts, and rates of return against the varying underlying assets. So, these scenarios are hypothetical and should only be used for illustrative purposes. If you want to, you could try ASIC’s moneysmart Superannuation calculator with different salary levels and contribution levels to see what could be possible. It’s what we used when we put together these examples, using the calculator’s default assumptions, on 21 August 2020.

Some other considerations

When drawing down on your super, some important considerations include understanding how much you need per year, managing your spending and income, as well as timing of your withdrawals.

You could try the handy Retirement Lifestyle calculator to paint a picture of what you’d like.

For example, if you withdraw from your super early in retirement, chances are you’re drawing down on the returns you’re earning, or have earned to date. Not on the capital itself. This also means that you have the potential to earn returns throughout your retirement.

You can also check to see how you’re invested. If you have a BT Super, BT Super for Life, BT Super for Life Westpac Group Plan or Asgard Employee Super Account, and if you don’t remember making an investment choice, chances are you’re invested in the 1940s BT Lifestage investment option, which sees your investments split more across slower-growth, generally less-risky assets, however still with a proportion in higher-risk growth assets to help outperform inflation, and provide an income throughout retirement.

This sort of investment structure is designed to help safeguard your super savings.

You can read more about Lifestage investing here.

Investing in retirement

When you’re retired, did you know that you can still earn returns on your investment?

Australians are living longer

The Australian Bureau of Statistics recently released a new set of life expectancy tables, and Australia now ranks #3 in the world for male life expectancy and #7 for females. The trend for the past 100 years is that life expectancy has risen by around 20 years.18

Given we’re living longer, what does this mean for your retirement income? Potentially we’ll need more money to see us through than we may have originally anticipated.

How much is enough?

While we all hope for a simple answer, how much you need for retirement differs from one person to the next. However, the Association of Superannuation Funds of Australia (AFSA) publish annual figures in their “AFSA Retirement Standard” to help approximate levels for a modest or comfortable lifestyle.19

The latest figures20 available state that a single person (aged 65) requires an annual income of $27,902 for a modest retirement lifestyle and $43,687 for a comfortable lifestyle.

For a couple (around 65 years of age), the figures rise to $40,380 and $61,909 – approximately 42 per cent higher.

For a comfortable retirement, the lump sum estimates are much higher – $545,000 for a single person and $640,000 for a couple, although this assumes receiving in part the age pension.

Read more about planning your retirement here.

Where will the money come from?

A common expectation is that when we reach retirement age, our accumulated super savings will be enough to achieve a desired figure, and enough to see us through our retirement years.

So, understanding the 10/30/6021 Rule can help you reach your retirement objectives.

Understanding the 10/30/20 Rule

The 10/30/60 Rule suggests that the income you end up having in retirement generally comes from the three following areas:

  • 10% from the money you’ve saved up during your working life.
  • 30% from the returns you earn on your investment before you retire.
  • 60% from the returns you earn on your investment during retirement.

In practical terms, this means that earning a solid investment on the savings you have post-retirement may be just as important, if not more important, than those you earn during your working years.

Here’s an example.*

After earning the average Australian salary of $67,01222, Jeremy retires with around $914,545 at the age of 70 by contributing $600 a month to super, in addition to his SG payments from the age of 30. For a comfortable retirement, he needs around $43,687 a year for annual living costs.23

For the first year of retirement he takes out this amount as a super income stream – often called an account-based pension. Then the balance of $870,858 remains invested.

After 12 months, this $870,858 increases to around $902,347 just from remaining reinvested, meaning Jeremy would still earn around $31,489 in one year on the super that remains, which in the first year of retirement is around 72% of his income stream for that year. For subsequent years, the same concept applies – keeping the balance of super invested once the super income stream has come out, so he can earn returns that can generate him an income.

*No two situations are ever likely to be the same, given the variables of things like time, contribution amounts, and rates of return against the varying underlying assets. So, these scenarios are hypothetical and should only be used for illustrative purposes. If you want to, you could try ASIC’s moneysmart Superannuation calculator with different variables to see what could be possible. It’s what we used when we put together these examples, using the calculator’s default assumptions, on 21 August 2020.

Retired? What to consider

  • It’s a good idea to seek independent financial advice if you want your super to last the distance.
  • You can also check to see how you’re invested. If you have a BT Super, BT Super for Life, BT Super for Life Westpac Group Plan or Asgard Employee Super Account, and if you don’t remember making an investment choice, chances are you’re invested in the 1940s BT Lifestage investment option, which sees your investments split more across slower-growth, generally less-risky assets, however still with a proportion in higher-risk growth assets to help outperform inflation, and provide an income throughout retirement. 

This sort of investment structure is designed to help safeguard your super savings.

You can read more about Lifestage investing here.

Things you need to know when investing

Your underlying super investments are a key factor in determining rates of returns on your super. Generally, when you’re younger, the higher-risk growth assets which typically yield higher returns, make sense as you’d have time to ride the ups and of any investment volatility.

On the flip side, if you’re heading towards retirement or are retired, the less-risky, slower-growth assets make sense as they help protect your capital from investment volatility.

If you can’t remember making an investment decision, chances are you were automatically put into either the BT Lifestage investment option within BT Super, BT Super for Life, or BT Super for Life Westpac Group Plan, or the Asgard MySuper Lifestage Investment Option within the Asgard Employee Super Account. The Lifestage investment option manages the investments for you, and automatically changes over time as you get closer to retirement.

You can read more about Lifestage investing here.

 

Next: Lifestage investing

Sources

1 Why super is a long-term investment
2 Australian Bureau of Statistics
3 Inc.com
4 Inc.com
5 ASFA Better Retirement Outcomes: A snapshot of account balances in Australia, July 2019
6 Australian Bureau of Statistics
7 Association of Superannuation Funds of Australia (AFSA)
8 ASFA Better Retirement Outcomes: A snapshot of account balances in Australia, July 2019
9 Australian Taxation Office
10 Association of Superannuation Funds of Australia (AFSA)
11 ASFA Better Retirement Outcomes: A snapshot of account balances in Australia, July 2019
12 Australian Bureau of Statistics
13 ASFA Better Retirement Outcomes: A snapshot of account balances in Australia, July 2019
14 Russell Investments
15 Australian Bureau of Statistics
16 ASFA Better Retirement Outcomes: A snapshot of account balances in Australia, July 2019
17 Super Guru
18 Australian Bureau of Statistics
19 Association of Superannuation Funds of Australia (AFSA)
20 Super Guru
21 Russell Investments
22 Australian Bureau of Statistics
23 Super Guru

Taking the time to lay some foundations for retirement can help you enjoy a rewarding lifestyle once you hang up your work boots. And the time to start is now.

We know that not everyone is the same. With this in mind, BT has a range of investment options, offering you flexibility and choice when personalising your super investment mix.
While the COVID-19 pandemic has impacted financial markets, there are still ways your investments can work hard. Read our four strategies for smart investing during a recession.

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