Tag Archives: Retirement Planning

Super fund performance and unlisted assets

By Robert Wright /December 01,2023/

Differences in the returns of various super funds have primarily been driven by whether the funds are invested in unlisted or listed assets.  

Super fund returns are always in the spotlight around the end of the financial year. This is when funds publish their annual performance results and send statements to members, and when researchers publish tables comparing fund returns. 

Going forward, fund members may notice a wider than usual gap between the performances of various super funds. 

A large part of the difference in returns this year comes down to whether – and how much – super funds have invested in unlisted assets. 

In recent years, super funds have been under pressure due to their practices around “lumpy” revaluations for unlisted assets concerning the quality, accuracy and frequency of revaluing unlisted assets.

Millions of super members are in the dark about these practices – and therefore about how much their investment is really worth.

In July 2022, the Australian Prudential Regulation Authority (APRA) released final revisions on Prudential Standard SPS 530, Investment Governance to ensure better member outcomes through updated requirements that increase stress-testing, valuation and liquidity management practices. 

The enhancements to strengthening investment governance have been in effect from January this year. 

What are unlisted assets?

Unlisted assets are investments that are not traded through a public exchange or market, such as the Australian Securities Exchange (ASX) or the New York Stock Exchange (NYSE). 

Investors in unlisted assets can either directly own the asset or invest with others through an unlisted trust. 

The most common types of unlisted assets are: 

  • Unlisted property – from small property syndicates with assets such as neighbourhood shopping centres to multi-billion-dollar unlisted property trusts which own major CBD office buildings, large shopping centres or hotels. 
  • Unlisted infrastructure – development or ownership of roads, rail, ports, airports and utilities. 
  • Private equity – invest in or own private companies, including early stage investments in technology companies. 
  • Private credit – involves lending to privately owned businesses.  

What are listed assets?

Listed assets are those that are traded on a stock exchange or share market, such as the ASX or NYSE.

The most common type of listed asset is shares, also known as equities.  

Other listed assets include:

  • Listed property – offers the ability to invest in a diverse portfolio of large properties through an Australian real estate investment trust or real estate investment trust on an international share market. 
  • Listed infrastructure trusts – trusts that invest in major infrastructure e.g. roads, rail and airports. 
  • Bonds – issued by a company or government to raise money which constitute a loan from an investor. 
  • Exchange traded funds (ETFs) – collection of assets that track the performance of a major investment index e.g. the S&P 500 Index. 
  • Managed funds – money from a number of investors which is pooled to buy investments.  

How are unlisted and listed assets valued? 

The difference in how unlisted and listed assets are valued is what affects super fund returns at any given time. 

Timing of valuation

  • Unlisted assets are typically valued at set intervals. For example, quarterly or annually. 
  • Listed assets are valued every day. Investors decide daily how much they are willing to pay for shares in the company or trust.  

Method of valuation

  • Valuations of unlisted assets are often made using historical or point-in-time factors. For example, unlisted property valuations are partly based on past sales of similar properties, which may have been completed when market conditions were different. As a result, values for unlisted assets are often different for the same asset in a listed market. 
  • Listed assets are valued by investors in an organised, open and transparent market. Valuations are an accurate, up to the minute reflection of what willing buyers and sellers in a market will pay. 

Continued criticism is that valuations arranged by asset owners could lead to biased results if asset owners judge the value of their own investments too generously.  

How does valuation timing impact your super’s performance? 

The difference in valuation timing means changes in economic, competitive and market conditions are reflected in the value of listed assets more rapidly than unlisted assets. Therefore, listed asset values are affected more in the short term by market ups and downs versus unlisted assets. 

Over the past months, central banks globally have sharply increased their interest rates in response to inflation. Rises in global and Australian interest rates have been quickly factored into prices for assets listed on stock exchanges. The result was an immediate fall in prices and losses for investors. 

However, these significant changes may not yet be reflected in the valuations of unlisted assets. 

Add to this the fluctuations in unlisted infrastructure and unlisted property funds, which many super funds are directly invested in, and the valuation of unlisted assets becomes a bigger issue. 

Essentially, the difference in performance lowers returns in super funds, especially those holding mainly listed property, while funds holding mainly unlisted property have not yet been affected. 

However, as unlisted property trusts go through their valuation cycles, downward returns are expected to be reported in those trusts, due to the significant devaluation risks in the higher interest rate environment. 

Why is liquidity in super funds important? 

Super is a long term investment and while you are accumulating your retirement savings, you may not need regular access to your money. However, super funds do need the flexibility to buy and sell investments to manage risk, respond to market conditions and take advantage of opportunities that arise.  

Super funds also need to maintain liquidity to meet the redemptions of retiring investors, so the liquidity of investments is crucial at a fund level.  

Source: Colonial First State 

Understanding market volatility

By Robert Wright /December 01,2023/

Many investors become concerned when volatility occurs in global financial markets – particularly about the impact on their superannuation and other investments. In times like these, it’s important to understand the causes of market movements and how to minimise your risk.

Why do markets move so much?

Markets are influenced by many things – industrial, economic, political and social factors can all have an impact. For example, consumer and business confidence affect spending and therefore company profits.

Global trade and production naturally affect economic growth. Poor political and fiscal decisions in some countries may lead to a flow on effect in other countries who are owed money. And of course, natural disasters can cause major damage to any economy with no warning.

During times of market volatility, it’s important to remember one of the fundamental principles of investing – markets move in cycles.

What is the effect of market volatility on super funds?

In times of market volatility your super balance may decline but it is important to remember that markets move in cycles. Volatility is a natural part of the economic cycle. Markets are influenced by a range of factors and are inherently unpredictable.

The Australian Securities & Investments Commission (ASIC) states that, ‘negative returns from time to time are not inconsistent with successful long term investment’. History demonstrates that over the long term, the general trend of share markets has been upward.

Don’t lose sight of the bigger picture

Super is a long term investment. Shares, which usually form a large part of most balanced super accounts, are also generally a long term investment. They are designed to provide capital growth over a period of five years or more. Think in years, not days.

The time frame for super may be 20 years or more, so short term volatility shouldn’t diminish the long term potential of your investments. Growth assets (such as shares) tend to fluctuate in the short term but have historically provided excellent returns for investors over the long term.

When share markets fall in value, it may be tempting to sell up. However, trying to time the market by selling now and buying back later is a risky strategy that rarely results in investors coming out ahead. By taking a long term view of investing, you can ride out any short term fluctuations in the market and take advantage of growth opportunities over the long term.

Diversification

Diversification is one of the most effective ways of managing volatility. It can help deliver smoother, more consistent results over time. Your investment may benefit by being spread across a variety of asset classes, including shares (domestic and global), fixed income, cash, direct and listed property and alternatives.

This diversification should help soften the effects of any share market falls as some asset classes often tend to do well whilst others are struggling. Also, spreading your assets around means you are less reliant on any one asset class at any particular time.

Understand your risk profile

All investments carry some risk. How much risk you’re willing to accept will be influenced by your financial situation, family considerations, time horizon and even your personality. If market volatility has caused you to reassess the way you feel about risk, it’s important that you see your financial adviser to discuss any necessary changes to your financial plan.

Understanding the implications of withdrawing

Before you withdraw from an investment you should understand all the implications, risks and costs involved.

Locking in your losses. If the value of your investment is falling, you are technically only making a loss on paper. A rise in prices could soon return your investment to profit without you doing anything. Selling your investment makes any losses real and irreversible.

Incurring capital gains tax (CGT). Make sure you know what your CGT position will be before selling any asset.

Losing the benefits of compounding. If you’re thinking about making a partial withdrawal from an investment, remember that it’s not just the withdrawal you lose but all future earnings and interest on that amount.

Key takeaways

Keep in mind that:

  • Super is a long term investment designed to generate sufficient money so you can enjoy your retirement.
  • Diversification is an important part of a long term super investment strategy. To create the lifestyle you want in retirement, it may be necessary to invest in growth assets like shares so that your returns stay ahead of tax and inflation.
  • It may be beneficial to ride out the bad times in order to achieve long term growth.

Your financial plan was designed exclusively for you to suit your investment objectives and risk profile. It’s important to stay focused on your long term goals.

Source: Colonial First State

Why investing for retirement is different

By Robert Wright /March 07,2023/

When you’re still employed and earning a salary, there’s money coming in you can rely on. In retirement, in the absence of a regular salary you’ll need to find a new way to secure enough income to cover your living costs.

Investing your money is one way to make the most of your savings and provide an income in retirement but if you’re expecting savings and investment earnings to help cover your expenses, it’s important to get your strategy right.

Why timing matters

When accumulating super for retirement, you can afford to be patient. With years ahead to top up your super, you can stay invested during falls in the share market and wait for markets and your assets to bounce back. For the few years just before and after retirement, it’s a different story. This period, known as the ‘retirement risk zone’, is the time when you have most to lose from a fall in the value of investments. Your super has likely reached its peak in value and you want to make the most of these savings for your future retirement income.

In order to protect your savings and provide you with income throughout your retirement, it’s important to be aware of three key risks:

1. Living longer

Australians are living longer than ever before. Life expectancy has grown by more than 30 years in the last century1. Living off retirement savings for 20-30 years or more introduces the very real risk of running out of money. So it’s no wonder more than half of Australians aged 50+ are worried about outliving their savings according to a 2019 National Seniors Australia survey.

We’re lucky that we live in a country that if your retirement savings run out; the Age Pension is there as a safety net but these regular payments may not be enough to maintain the lifestyle you’ve been enjoying in retirement. You could also be left with limited funds and options for aged care, if you should need it. That’s why it’s so important to make a financial plan early in your retirement so that you can help to protect your income now and in the future.

2. Inflation

Inflation measures the change in the cost of living over time and represents an important and often underestimated risk to your financial security in retirement. Given your retirement could last 20 plus years, there’s a good chance your savings and income will be affected by inflation. At an average annual inflation rate of 2.5%2, a dollar today is worth roughly half what it was 25 years ago. Even this modest year on year rise in the price of goods and services can put you at risk of having an income that no longer covers your living expenses from year to year.

3. Share market performance

Share market performance is a risk for investors with exposure to investments such as shares, bonds and commodities. If you’re worried about market collapses similar to the Global Financial Crisis (GFC) in 2008, you’re not alone. A 2018 National Seniors Australia survey found that 7 out of 10 older Australians share your concerns.

Falls in the value of investments are impossible to predict and can make a big difference to income and financial security throughout your retirement. When investments earn negative returns, your retirement savings are falling in value. Crucially, if you also need to make regular withdrawals to pay for living expenses, it’s a twofold blow for your overall financial position in retirement. Less savings now means more potential for outliving those savings later in life.

Protecting your income and future in retirement

Diversifying your investments – balancing growth and defensive assets for example can limit the impact of market risks and inflation on your retirement savings. However, even with a well diversified portfolio, your super and Age Pension may not provide you enough income for your entire retirement. If you’d like the peace of mind that comes with a regular income for life, a lifetime annuity might be right for you.

Using a portion of your savings or super, you can invest in a lifetime annuity and receive regular income payments for life. It can act as a safety net ensuring that you will receive income for life, regardless of how long you live.

Talk to an adviser about the benefits of a lifetime annuity and whether it might be right for you.

[1] Australian Bureau of Statistics, Life Expectancy improvements in Australia over the last 125 years, 18 October 2017.

[2] Australian Bureau of Statistics, 70 years of inflation in Australia, Andrew Glasscock, 2017. Fig 2.

Source: Challenger

Tips for Managing Money in Retirement

By Robert Wright /September 08,2022/

Aussies are living longer than ever before, with men expected to live until age 80 and women until age 85.

However, an increased life expectancy also means Australians may spend longer in retirement than previous generations, and in turn, need more money to fund retirement during those extra years.

When you’re retired and no longer earning money, it can be difficult to know how much you can afford to spend and what you need to preserve for the future, without the fallback of a regular retirement income.

You may also have added pressures in the mix, such as paying off debt, healthcare costs, and dependants in the form of kids or elderly parents.

Striking the right balance between enjoying your retirement and having enough to live on can be tough. However, you don’t have to go without – you may just need to consider your budget a bit differently.

If you’re planning your retirement , here are some money management tips that may help you get off on the right foot.

Look into having a U-shaped budget

Rather than a linear budget, where your expenses remain the same year after year, it may be worth considering a ‘U-shaped’ budget in your retirement. This is where your spending over the period of your retirement resembles a ‘U’, with the highest expenses in the first years of retirement and your later retirement years.

When you first retire, your spending will most likely be higher as you take that trip of a lifetime, splash out on that caravan or boat, or pay off your home loan (or all of the above) and engage in an active, and possibly more expensive, social life.

Your spending is then likely to settle into a more regular pattern in mid-retirement, before increasing again in your later years when greater healthcare costs and aged care expenses come into the mix.

Tips for paying off debt in retirement

Carrying debt into retirement isn’t ideal, but it’s a reality for many of us. If you find yourself owing money on your credit card, a personal loan or home loan once retired, there are things you could look into to help manage your repayments and minimise the amount of interest you pay.

Consolidating your debts by bringing them together into one loan could mean you pay less in interest, fees and charges. You could also contact your providers to try to renegotiate your repayment terms.

How much super should I have, and can I use this to pay off debt?

Some Australians withdraw their superannuation as a lump sum once they reach their super preservation age and use it to clear their debts, to avoid having any repayments and interest during retirement.

If you’re considering this, think about whether you’ll still have enough to live on in retirement, and the tax implications of doing this. In this case, it’s a good idea to speak with a financial adviser to weigh up your options.

Consider where you can save money

Although you may not have a steady income like before, it’s still possible to save money so you have more to spend on what’s important to you during your retirement. You can do this by leveraging some of the government’s benefits and subsidies, or by reducing your expenses.

Here are a few ideas to get started:

Consider selling your second car (if you have one), and take advantage of public transport concessions available to seniors instead. You may be able to save on car registration, insurance and maintenance costs, plus you’ll be doing a bit for the environment.

Take a look at government websites to learn about benefits and payments you may be able to access, such as pensions, allowances, bonuses, concession cards, supplements and other services.

Consider bundling your phone and broadband to save on technology bills, and your electricity and gas to save on energy costs. Compare providers’ rates through comparison websites and ask if they offer a seniors discount.

Think about ideas to entertain more at home instead of going out, such as dinner parties, game nights or movie nights. It also may be handy to subscribe for newsletters to your favourite restaurants and shops, or invest in a coupon book like the Entertainment Book, so you can take advantage of any offers and special deals when you do go out.

It may be worth putting your bills onto direct debit rather than paying them month by month. This way, you may be eligible to qualify for the pay on time discounts and avoid late fees if you forget a payment.

Groceries are a necessary expense, but it’s possible to save money here as well. Consider researching online for sales ahead of time, buying seasonally for fruits and veg, or buying in bulk and sharing with family or friends.

Tips if you’re helping your family financially

If you’re part of the ‘sandwich generation’, with elderly parents who are dependent on you and adult kids who are still at home or continue to need a bit of financial assistance, it’s still possible to have a good quality of life in retirement.

In order to do so, it’s all about finding balance. It’s important not to lose sight of your own goals during retirement, while still helping the ones you love. You may consider having some conversations with your children on the limits of what you can provide, and spend more time to help them understand the benefits of financial independence: for example, instead of financial assistance, perhaps you can help them with some invaluable financial education.

Tips if you’re estate planning

Estate planning is also an important part of your financial planning in retirement. Estate planning goes beyond just making a will. It can also be valuable to think about who your super beneficiaries are, and how you want to be looked after (both medically and financially) if you can’t make your own decisions later in life.

If you get your estate in order during the early years of retirement, it means more peace of mind in the long term and could potentially help prevent some family tensions in the future.

When planning your estate, here are some key things to think about.

Who will get your assets?

Making a will plays a big part in estate planning. A solicitor or estate lawyer can help you draw up a legally binding document that advises who should receive your assets after you pass away. If you don’t have a valid will, your estate will be distributed in line with the law in your relevant state.

Who is your executor?

An executor is the person responsible for making sure your assets are distributed according to your wishes, as well as paying bills, closing any banks accounts, and so on.

Who are the beneficiaries for your super?

Your super is often treated differently to the other assets in your will, so it can be useful to think about this as a separate aspect. Consider how you want your super to be distributed after you’re gone and try to keep your super beneficiary nomination up to date. If you don’t, there’s a risk that your super money may end up in different hands.

Who is your enduring power of attorney and/or guardian?

If you have an enduring power of attorney, you are allowing someone to make financial decisions on your behalf. In some states, your power of attorney holder can also make lifestyle decisions, such as health and medical choices and where you live, while in others you’ll need to appoint a separate guardian to do this.

Source: AMP