The benefits of investing in retirement

30 August 2022

Many people mistakenly think that investing should stop as soon as they get to retirement – that retirement is the time to live off their savings and avoid financial risks.

The following article looks at the risks associated with this thinking and why it makes sense to continue investing in your retirement years.

Retirement can be long

According to the Australian Bureau of Statistics*, life expectancy in Australia has grown by more than 30 years in the last century.  Living longer means retirement funds have to last longer.  And while the Age Pension provides a safety net in case money runs out, pension payments may not be enough to maintain a good quality retirement. This is why it’s so important that your retirement savings continue to be invested after your working days are over.

 

Inflation

Inflation measures the rate of increase in the price of goods and services over time. Although we can’t be certain about what the cost of goods and services will be in future years, it’s highly likely that the cost of living will continue to rise. At an average annual inflation rate of 2.5%, the value of your dollar is halved over 30 years. 

Even this modest annual increase in the price of goods and services can put you at risk of having an income that no longer cover your living expenses in retirement. That $4.50 coffee could cost $9.45 in 30 years.

Visual shows the price of items like a loaf of bread ($2.80) and a litre of milk ($1.65) in 2021 and the forecast price of these items in 2051, assuming a 2.5% inflation rate each year.

The above examples assume an annual price inflation rate of 2.5% each year.

Low interest rates

The impact of low interest rates is that cash investments will not cover rises in inflation.

The level of market interest rates is the primary driver of returns for the Cash investment option. Higher interest rates may lead to higher returns, and the same goes for lower interest rates resulting in lower returns. 

The Reserve Bank of Australia started to lift interest rates in May 2022. However, the market expects that returns for cash investments will remain comparatively low for the foreseeable future. 

To put it simply – there’s a very high risk that an investment in the Cash investment option now, may result in your super savings not being able to keep up with rising costs over time.

 

The risk of market volatility

Apart from the risks of rising inflation and outliving your money, another risk for retirees is market volatility that can impact your balance and financial security. When investments deliver negative returns, your retirement savings fall in value which can further increase the chances of outliving your money. Investing in a mix of assets that provide both growth opportunities and downside protection may provide a smoother ride through the ups-and-downs of the share markets.

 

Why staying invested in retirement may be right for you

While it’s normal for investment markets to go up and down, history has shown that the markets continue to increase in value over the long term.

History has also shown, that members who stay invested in growth assets and stick to their long-term plan, often end up in a better position than those who keep changing their investment options or choose only defensive assets.

The chart below shows that $50,000 invested in the Balanced option (Choice Income) from its inception on 1 January 2008, grew to $134,087 as at 30 June 2022, despite times of market volatility such as the global financial crisis in 2008 and the pandemic downturn in 2020.

Balanced option growth of $50,000, since 1 January 2008
An area chart showing the growth of $50,000 invested in the Balanced option in January 2008 to $134,087 as at 30 June 2022. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns. Doesn’t include administration, insurance or other fees and costs that are deducted from account balances.

Growing your savings without losing sleep

Investing in retirement can help provide an income to cover your expenses and retirement lifestyle. Unlike your working years however, it’s important to manage your financial risks by putting in place the right investment strategy for your specific circumstances.

A diversified retirement portfolio that includes a range of growth and defensive assets can limit the impact of inflation and market volatility on your retirement savings.

AustralianSuper offers members a range of retirement investment options with different investment objectives and risk levels to suit individual circumstances and risk preferences. Let’s take a look at some of these options.

Three pie charts – each showing the strategic asset allocation for the Balanced, Conservative Balanced and Stable options. The Balanced option has a 21% exposure to Australian shares and a 31.5% exposure to international shares. Investment returns aren’t guaranteed. Past performance isn’t a reliable indicator of future returns. AustralianSuper investment returns are based on crediting rates, which are returns less investment fees. Doesn’t include all administration and other fees and costs that are deducted from account balances. Investment returns aren’t guaranteed.

 

The aim is to beat inflation

  Balanced Conservative Balanced Stable
Investment objective CPI + 4% pa over the medium to long term CPI + 2.5% pa over the medium term CPI + 1.5% over the medium term
Minimum investment timeframe At least 10 years At least 7 years At least 5 years

 

Choice Income performance as at 30 June 2022
  Balanced Conservative Balanced Stable
1 year -3.02% -3.33% -2.82%
5 years pa 7.89% 6.12%  4.42%
10 years pa 10.27% 8.41%  6.38%

 

Each of these options offers a different level of exposure to various types of investments, like listed shares, direct property, unlisted infrastructure, fixed interest and cash. While the Balanced option provides exposure to a range of growth and defensive assets, you can choose to reduce your market risk by investing in an option with more defensive assets. Or, you can choose a combination of options. For example, it’s possible to invest a certain percentage in the Balanced option for the higher returns and another percentage in the Stable option to reduce your market risk.

The following chart provides a snapshot of the performance of a $50,000 investment in each of these options compared to the Cash option, over a period of 10 years to 30 June 2022.

Choice Income options Growth of $50,000 over 10 years to 30 June 2022
A line graph showing the growth of $50,000 over10 years to 30 June 2022, when invested in four different investment options – Balanced, Conservative Balanced, Stable and Cash. We see that the $50,000 grew to $133,037 when invested in the Balanced option and $61,371 when invested in the Cash option Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns. Doesn’t include administration, insurance or other fees and costs that are deducted from account balances.

 

Accessing expert financial advice

Working out the best investment strategy for your retirement can be challenging.  If you need help with this, we’re here for you.  

AustralianSuper provides financial help to members in a number of ways.

 

Your advice options

 

*Australian Bureau of Statistics – Life tables, 2018-2020

Investment returns aren’t guaranteed. Past performance isn’t a reliable indicator of future returns. AustralianSuper investment returns are based on crediting rates, which are returns less investment fees. Doesn’t include all administration and other fees and costs that are deducted from account balances. Investment returns aren’t guaranteed.

This may include general financial advice which doesn’t take into account your personal objectives, financial situation or needs. Before making a decision consider if the information is right for you and read the relevant Product Disclosure Statement, available at australiansuper.com/pds or by calling 1300 300 273. A Target Market Determination (TMD) is a document that outlines the target market a product has been designed for. Find the TMDs at australiansuper.com/TMD.

AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.


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