For something that impacts every single Australian, most people are in the dark about the inner workings of superannuation.
So we’re taking it back to basics to help you understand the flow of money, how it’s invested, and what changes you can make to control your account. After all, superannuation is your money.
Since Paul Keating brought in compulsory super, it’s been just that. Compulsory. So it’s best if you embrace and understand the concept sooner rather than later.
Think of super as enforced savings. Most people can’t save the equivalent amount themselves, so it’s hugely beneficial if super is there as your safety net. It’s useful to think of superannuation as a structure that gives you tax breaks without requiring an offshore bank account. That’s because it’s taxed at far less than any other income you will receive, or any other investment in your name.
The image below shows a comparison between an individual’s tax rate, assuming they earn $60,000, and the tax rates of a company, super and the pension.
First things first: where does my superannuation go?
Generally speaking, your employer pays a minimum of 9.5% of your salary to your nominated super fund. Your employer will typically pay your super every month.
As your super money doesn’t flow through your personal bank account, it can be easy to forget that it’s yours. Don’t be fooled, it’s definitely your money.
From here, all superannuation money is invested into something, somewhere. Typically it’s into a range of shares, bonds and cash. More on this below.
What’s a Core Portfolio and how do you select yours?
We offer seven Core Portfolio options, and they’re weighted between Growth and Defensive assets at different levels, giving you the option to tailor your portfolio to meet your financial objectives. In the case of superannuation, your objective should be ending up with an account balance that will provide you a level of retirement that allows you to enjoy the life you want.
When you select a core portfolio, you’re nominating which assets you want your money in.
The main asset classes are
- Fixed interest (e.g. government, semi-government and corporate bonds)
- Property (both listed and directly held commercial, industrial and residential property)
- Australian shares
- International shares (including emerging market shares)
- Alternative assets (e.g. hedge funds, commodities, precious metals, infrastructure etc.).
Shares have the highest potential return, but also the highest risk. On the other hand, cash has the lowest risk since it is backed by the government, but also provides the lowest potential return.
Opting for a specific asset allocation approach does not guarantee a certain return. However it does provide a framework within which an investor can aim for an expected return (eg: higher or lower) for a given level of risk.
When looking at investing, and further understanding risk appetite, there are two broad categories to understand.
Growth and defensive
The growth category is what gets us excited! It contains investment options that are deemed to be higher risk but aim to reward you with a higher return. To get you these high rewards, this category invests in shares: units of ownership in a public company.
The growth category is made up of both Australian and international shares, and they invest in a lot. Like over 7,500 companies globally, resulting in a well-diversified portfolio. This is one way to ensure you don’t have all your eggs in one basket.
The defensive category is designed to minimise volatility. Think of it like playing it safe. Made up of cash and fixed interest bonds, they’re less exposed to market changes, and bring stability to your portfolio.
So considering timelines again, an individual with decades before retirement will traditionally be able to handle higher growth investments. But if Carribean cruises with other 85-year-olds are on the horizon, you may think it’s better to park your super balance in a defensive category, to hold that money steady.
All superannuation is invested somewhere and it’s up to you to choose how you wish to invest.
Learn more about how to invest YOUR super by making an Appointment with our specialist advisor today.