Australian's retirement savings are taking a hit as the Chinese dragon breaths fire, causing sharemarkets around the world to tumble.
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Once more, as we last saw with the Greek debt crisis in the dying days of the financial year, the Achilles heel of Australian super – its very high exposure to shares – is having a big impact on account balances.
Australian retirement savings are hit hard whenever sharemarkets dive because the typical superannuation fund has about half its money invested in shares.
Australian share prices are down by almost 20 per cent since late May.
Globally, shares are down about 10 per cent over roughly the same period.
A 10 per cent loss on global sharemarkets translates to super account balances dropping by about 5 per cent.
On an account balance of $100,000 that is a loss of $5,000 and a loss of $10,000 on $200,000.
As always, the current market panic should not be allowed to cloud the aims of superannuation.
Super is the longest of long-term investments and there will be ups and downs along the way.
Long-term performance
Over the longer term, super funds have served their fund members well.
The proof is in the longer-term performances of funds.
Over the five years to June 30 this year, typical balanced investment option of the 50-largest superannuation funds, as reported by SuperRatings, produced an average annual return of 9.1 per cent.
Over the past seven years to June 30, this year, the typical balanced investment option produced an average annual return of just under 6 per cent.
With the market falls of July and the falls so far in August, those returns will be lower, but they are still very good.
Funds have what they call return objectives. The usual return objective is to beat inflation over five-year periods of 3.5 percentage points a year, on average, after taxes and fees.
Since the start of compulsory superannuation in 1992 the typical annualised return is 8.1 per cent.
Now consider that over that period, inflation has averaged about 2.6 per cent. That means a "real" return (above inflation) of 5.5 per cent a year, on average.
Fund members should not be overly concerned about the latest bout of market gyrations. There are already signs that the worst may be over with bargain hunters jumping in, pushing share prices a little higher.
Although most people have their super with their fund's balanced investment option, funds have several options with differing risk-versus-return trade-offs.
Those nearing retirement or in retirement may want to consider whether their super is too risky; though, even in retirement, the investment time frame will be a long one.
Sydney Morning Herald
