Volatility may push super returns down to single digits: how to protect your nest egg

Your super fund return may reach the mid-single digits if the predictions of a veteran investment manager come to fruition. But there are ways Aussies can protect their nest eggs today to reduce the impact of lower returns.

Ian Patrick, Investment manager of Australian Retirement Trust – the newly merged Sunsuper and QSuper mega fund – believes that we are “in for a year of volatility”.

“Some of that will be driven by surprises on the pathway to interest rate rises … The geopolitics introduces (another layer) of volatility,” Mr Patrick told The Australian.

“Even though interest rates are ticking up they’re structurally low. And without the threat of a recession, I think it is plausible to get something in the upper half of single digits this year.”

This news may come to the shock of many Aussies with super funds after a year of investments seeing returns in the double digits. According to SuperRatings data, the top 10 ranking super fund options saw returns between 12% and 15.87% in the 12 months alone.

“The uncertainties have escalated a little bit since the start of the year. The geopolitical environment is more fragile and that has all kinds of knock-on impacts on energy prices, which will weigh on sentiment and be tough for equities potentially,” said Mr Patrick.

“That may weigh (on markets) because sharply rising inflation, particularly supply shock-type inflation, will be very hard on equities and probably hard on real assets, even though they have some level of inflation resistance.”

“Adding up the uncertainties and maybe I’m too optimistic. Maybe (returns) will be in and around 5 per cent,” said Mr Patrick.

How to grow your super in a period of lower returns

It’s not uncommon for your super balance to experience fluctuating rates of return over 40+ years of working and contributing to said fund. This is why it’s important Aussies consider some options that may help to protect your retirement savings if, and when, lower returns occur.

• Carefully consider your investment options

The right investment option can be the difference that helps you enjoy a comfortable and luxurious lifestyle in your retirement.

Depending on your appetite for risk and how you prefer your funds to be invested, it may be worth doing some research and speaking with your super fund about switching your investment options if you’re unhappy with your current strategy. Keep in mind that funds may charge an investment switching fee for this process, so factor this cost into any decision you make.

Most funds provide a choice of options and asset classes, with the following four being the most common:

• Growth – Opportunity for higher returns through riskier investments but may have an adverse impact on your returns if the market is in a state of fluctuation. Typically, 85% of your money is invested in property and shares.
• Balanced – Your returns may be lower compared to growth investments, but your risks of feeling market volatility may be lessened. Typically, 70% of funds are invested in property and shares and the remainder in cash or fixed-interest investments.
• Conservative – With an aim to reduce investment risk you may find returns can be lower than balanced or growth, but in times of market fluctuation your investments may be more stable. Typically, 30% is invested in property and shares, with the remainder in cash or fixed income securities.
• Cash – Almost 100% of your funds are invested in deposit-taking institutions such as banks, credit unions and building societies. Your return is typically stable due to this.

• Cut down your fees

Another factor that significantly impacts your final super balance at retirement is not just your rate of return, but the fees you pay. Fees are typically displayed as a dollar amount or a percentage (or both).

These range from administration fees, investment management fees, financial advice fees, activity-based fees, performance fees, investment switching fees and more. Generally speaking, a super fund that charges lower fees may cost you less over your working life. If your super fund’s fees are starting to eat into your nest egg, it may be worth comparing low-fee options.

• Pre- and after-tax super contributions

One of the most popular ways to grow your super balance even in a time of volatility is through voluntary super contributions. The two main ways Australians can make additional payments into their super balance are:

• Pre-tax super contributions - Also known as ‘salary sacrifice’, pre-tax super contributions are paid into your super fund from your pre-tax income by your employer at your request. These are additional payments made on top of your super guarantee amount, and comprises what is called your concessional contributions.
• After-tax super contributions – Also known as ‘non-concessional contributions’, you may also make additional payments into your super balance from your after-tax pay.

To find out more about government co-contributions and to see if you are eligible, visit the ATO website.

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