Insights

Episode 1 - Investing in superannuation versus retirement

23 July 2018

Episode 1 - Investing in superannuation versus retirement

The information included in this recording is general advice only and has been prepared without taking account of your objectives, financial situation or needs. Please refer to the full disclaimer at the bottom of this page.

Welcome to the first in a short podcast series from Bennelong Funds Management. Over four episodes we’ll be speaking with Stuart Fechner, Account Director of Research Relationships, about investing for superannuation versus retirement; the differences between active and passive investing; and what to look for in an investment fund.

So Stuart, when constructing an investment portfolio, do you approach things differently if an investor is in the superannuation phase versus retirement?

Both are important and while its somewhat of a continuum, the key differences can mean a different focus and reasoning in constructing a portfolio.

What are some of the differences between the superannuation and retirement stages that might impact the structure of an investor’s portfolio?

Superannuation is earlier in an individual’s working life, hence investors have a relatively longer time horizon.

  • Super effectively has only one side of the income and expenditure ledger – that is ‘compulsory money’ in, but no money out (it’s like saying it’s all income and no expenditure).
  • Superannuation also has a relatively defined timeframe of investment. You may not exactly know when you will retire, but there is a guided ‘retirement age’ and most people would be able to estimate their retirement age or a planned retirement point.

Retirement (post super) on the other hand, can be viewed as the opposite.

  • While retirement for most will last for quite some time, e.g. 20 years, it is on average a shorter timeframe than the years spent in accumulation.
  • Retirement is also only one side of the income and expenditure ledger, however, it is the opposite side. In retirement, in terms of cash flow, it is mandated that a minimum amount is withdrawn – a vastly different scenario to the mandate of money going in within superannuation.
  • The length of time someone is in retirement is more uncertain than the superannuation timeframe. Here the end-point is effectively upon someone’s death – and while good estimates of average life expectancy exist, it is only an average. A person’s individual experience can and does vary quite a lot around this average – this in itself provides some challenges.

What do these differences mean in a practical sense? What challenges or changes in mindset do investors face?

Super is a more homogenous scenario – even though we are talking about people and individual investors, somewhat of a common objective exists.

Because superannuation money effectively can’t be touched or withdrawn, and we know that money is being put into the superannuation account on a regular basis, the key and common objective is to grow this investment pool as much as possible.  At the end of the day, this becomes your retirement nest egg.

However, everyone has a different level of risk that they can, or are willing to, tolerate – so effectively the aim is to maximise the return for the given level of risk.

Effectively it is a fundamental risk/return decision that needs to be made.

You mention the homogenous nature of superannuation, but every investor is different. What exactly do you mean?

An individual’s preferred risk/return strategy for their superannuation portfolio is not dissimilar to that of a large institution. Both are aiming to grow the amount invested at a certain risk/return level, having in mind the use of those assets at a later point in time.

The same scenario applies for those seeking to maximise a return outcome for a designated or acceptable level of risk. The amount of money invested may be different, but the same risk/return trade-off is faced.

This sounds quite structured as opposed to something with any real personal engagement attached to it – is that what you mean?

In a way that’s true. I think for most investors, the money they have in their superannuation is somewhat foreign or distant to them and a challenge to engage with. After all, you can’t touch it or use it, so as the balance of the superannuation account goes up and down there is no immediate or near-term impact on the investor.

Effectively all they see or experience is an account balance number on their superannuation statement.

Back to your comment about the ‘efficient frontier’ and the risk-return trade-off.

Picture an efficient frontier – which may be a straight line or perhaps more a crescent moon shaped line. Every part or point on the line represent a different risk and return outcome.

Equally, each part or point also represents a different mix of asset classes – including for example Australian shares, global shares, property, fixed income and cash.

What the risk return trade-off seeks to illustrate is that to improve one side of the equation (such as seeking an expected higher return) this typically means also taking on a higher level of risk.

So if the return outcome is driven so much by asset allocation, is it worth the time and effort of assessing any other factors or inputs when constructing a portfolio?

Yes, it is. While asset allocation is a key driver of the risk/return outcome, as someone moves from superannuation into retirement, the level of relative importance changes – this is at the heart of what I’m saying.

It is important to consider and understand the different environments of superannuation and retirement and what it means for investing.

For example, further to risk and return, other important items of consideration include:

  • The time horizon of the investment
  • The consistency of how the returns are achieved
  • How much money do I need
  • How much of the total return is in the form of income versus growth
  • The protection of capital and minimising negative returns or drawdowns
  • The associated cost or fees.

Superannuation and retirement are different environments that experience different cash flows and timeframes. Effectively, superannuation is illiquid and cannot be drawn down on, whereas it’s the opposite within the pension phase.

Recognising this is extremely important.

I’m not suggesting that selecting a fund on its related characteristics is not important, but the scope and level of this importance increases during the pension phase.

Why do you think that is?

As we’ve touched on, one of the key drivers is the difference in the environment, associated rules and characteristics between superannuation and retirement.

Plus, the behavioural element and personal engagement investors typically have with their money in retirement is stronger than that within the superannuation environment.

In pension these savings can now be used, meaning something far more tangible than an account balance on an annual superannuation statement. The dollars are being drawn down and these retirement payments effectively represent a retiree’s wage or income.

All these factors present challenges for retirees that are not faced in the same way when they are younger and within the superannuation environment.

Typically, the more specific or multi-faceted an investor’s needs or objectives, the greater and more specific the mix of tools (or funds).

Asset allocation still plays a very important role, but I believe that to achieve the more specific needs and goals of a retiree, the selection of individual funds grows in importance.

And in the next episode, we’ll spend time talking in detail about the importance of fund selection in retirement, and why this is so important. We hope you enjoyed this podcast, and encourage you to visit bennelongfunds.com for more insights from the team.


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