Is your super ready for the next big fall?
The scariest global share market drop since the global financial crisis (GFC) recently wiped $64 billion off the Australian share market, affecting everyone who has a superannuation account.
The meltdown was followed by what looks like recovery, as bargain hunters sniff around in search of undervalued shares – of which there are likely more than a few.
Your super account undoubtedly took a hit, not least because Australian retirement funds are more exposed to the share market than most. When the S&P ASX 200 fell 40% between March 2008 and 2009, most of us had no choice but to go along for the ride. It was a long way down from the dizzying heights of November 2007.
Australian superannuation funds as a whole lost $160 billion between December 2007 and June 2009, in part because the average "balanced portfolio" – where most Australian super money is held – is mostly shares.
A lot of that loss has been made up by now, as long your super account has had time to recover.
The median superannuation growth fund gained 9.8% in value in financial year 2014–15 according to rating company Chant West. And most super funds have delivered positive returns for the last six years in a row.
Retirement risk zone
How much financial pain the latest share market conniptions will bring to bear depends on how close you are to retirement. If you'll need to access your super account soon, you'll generally take a bigger hit from this than younger employees.
An earlier CHOICE investigation into the effects of the GFC on super accounts focused on the "retirement risk zone" – about five years before and after retirement – when your super account is particularly vulnerable to dramatic market downturns.
A 10% drop in share markets worldwide translates, roughly, into a 5% decline in your super account. And global share markets have dropped about 10% since May this year. So it's all a matter of how long it takes to make up the lost 5%.
Are you well allocated?
As any good financial adviser will tell you, superannuation is a long-term investment. But it's always a good idea for older employees to keep an eye on the short term and talk to their super fund manager about asset allocation – especially in this brave new world of global financial interconnectedness.
Australian super funds had the highest exposure to share markets among all OECD countries during the GFC and, then as now, very few Australian super funds significantly reduce exposure to the share markets while shifting from accumulation to the drawdown/pension phase.
Our earlier investigation revealed that the average proportion of super invested in equities drops from about 74% to 67% as account holders approach retirement. Were the Australian share market to lose $64 billion and not make it back up for years, 67% exposure would probably be too much.
How to play it safe if you're near retirement
Playing it safe in the retirement risk zone means talking to your fund manager about re-allocating toward fixed-interest products such as bonds or term deposits.
At a minimum, review the level of risk in your account and discuss safer options with your fund manager, whether or not you end up deciding that it's time to reduce risk.