A bumper year for super but Aussies can do better

Do you feel richer than you did a year ago? You should.

The typical n has earned 10.5 per cent on their superannuation in 2017, according to an estimate by SuperRatings.

But the fact is many of us should be doing even better.

The 10.5 per cent return is for the typical “balanced” option. Regardless of what the fund calls it, SuperRatings defines a “balanced” option as one with 60-76 per cent of the assets invested in growth assets such as shares.

If you didn’t select a different investment option – such as “conservative” or “growth” – then you’re probably in the “balanced” option. Two out of three ns are in their fund’s default option, which is usually “balanced”.

The problem is most people should not be in the balanced option. Your exact risk profile depends on individual circumstances, but as a rough rule of thumb you might take the “aggressive” or “high growth” option when you start working, shift to “growth” at age 40, and only move to “balanced” at age 55. But you’ll only stay in “balanced” for a few years, because you might want to move to “conservative” when you’re about 65.

The higher the risk, the higher the likely returns, but you’ll want to dial down the risk in the lead-up to and after retirement because there’s less opportunity to make up any losses.

The recent MLC Wealth Sentiment Survey, which had more than 2000 respondents, found about one in four Aussies don’t know what risk profile they’re in, meaning they could potentially be missing out on much greater returns. Men were more likely to be across this detail than women.

Now 10.5 per cent for the typical balanced option is all very well, but the typical growth option returned an estimated 11.7 per cent in 2017 and the typical high-growth option delivered 13 per cent.

Over time a few percentage points’ difference in returns can add up to hundreds of thousands of dollars, because of the magic of compound growth, where you earn money on your returns as well as the original amount.

Of course one year’s worth of returns doesn’t mean much – superannuation, like any investment, has good years and bad years. The hope is to get enough growth in the good years to outweigh the bad.

Fortunately the returns are solid over time as well. Over the five years to November 30, 2017, SuperRatings says a typical balanced option delivered an average 9.9 per cent a year for people still working (accounts in accumulation phase) and 10.9 per cent for retirees (accounts in pension phase).

This is out-performance given that SuperRatings says the earnings target for a balanced option is 3.5 percentage points above inflation – which is running at 1.8 per cent. The growth came from the n sharemarket, which rallied in spurts, and the falling n dollar, which boosted international share returns.

But the more aggressive options did better still – an average 12.6 per cent a year over five years for a typical high-growth option and 11.2 per cent for growth.

Over the 10 years to November 30 the returns are slimmer because it captures the period of the global financial crisis. Even so, the results are reasonably close to target and given that interest rates have been low for some time, certainly better than keeping your money in the bank.

Which is just as well given that a large proportion of superannuation is compulsory.

Caitlin Fitzsimmons is the Money editor. Read her columns on work, money and life or find her on Facebook or Twitter.

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