Australians are likely to be in for a nasty surprise at the end of this fiscal year when they look at their super balances.
Aussies may be in for an unpleasant surprise at the end of this fiscal year when they look at their retirement balances.
The money Australians put into their funds is invested in stocks and bonds, with the idea that they will grow over time to return a healthy balance for their future retirement.
However, if you’ve been paying attention to what’s been happening in the economy in recent weeks, you may have noticed that the stock market isn’t doing well.
Australian equities took a massive hit of 6.6 percent last week, marking a massive 15.3 percent drop from April’s all-time highs.
Retirement funds are not only invested in the Australian stock market, with most funds adding a mix of bonds, offshore stocks, real estate, infrastructure and other alternative assets to the mix meaning there is less risk in the event of an ASX. crash.
However, the impact of the current global financial chaos – fueled by skyrocketing inflation, high interest rates and fears of a recession – is so great that experts are warning Australians will be dealt a “double whammy” on their super balance.
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Some warn of hits of up to 5.5 percent when Australians open their year-end statements in a few weeks.
For someone who has $147,425 in their retirement fund — the national average amount an Australian has, according to the Association of Superannuation Funds of Australia (ASFA) — they could make as much as $8.1k in their retirement savings when they open their statements this tax time.
Extreme Market Volatility hit super funds in aprilwith the median growth fund falling 1.2 percent, but Shane Oliver, chief economist at AMP Capital, believes heavy falls in the Australian stock market since then will push the funds down to 5 percent.
“The average is likely to fall 4-5 percent,” he told news.com.au. “It’s disappointing because it would be the biggest drop since the GFC in 2009 when they lost about 13 percent.”
He said super-funds took a “double whammy” this year as bond values also took a major hit.
Bonds are issued by governments and corporations when they take on debt, usually promising a fixed rate or coupon rate for a specified period.
dr. Oliver said they typically make up about 25-30 percent of super fund investments, while stocks make up about 60 percent.
But like stocks, he said the value of bonds has also been hammered, saying they’ve had their worst financial year since the 1970s.
Why you shouldn’t panic
While a 5 percent drop in your retirement savings may seem disconcerting, said Dr. Oliver that it’s important to put it into context.
“Stock markets are quite volatile, so there is always a risk that they could fall,” he said. “But you have to remember that super is for retirement, which means it’s a long-term investment spanning several decades. It’s going to be an investment of at least 20 years for most of us.”
So while there is likely to be a decline this year, it was offset by years of very strong growth in super funds.
For example, the median super-fund rose by 13.4 percent last financial year and by 14.7 percent in 2019.
dr. Oliver said the average fund is up a healthy 8.5 percent over the past 10 years and that a 5 percent drop this tax time would bring that down to 8.3 percent — which he says is “still a pretty good return”.
Not only that, he said there is an upside to the downturn as those who continue to invest in their supers during the downturn will get more bang for their buck because stocks are cheaper.
That, he said, could help your fund grow faster in the future.
“The decline in supervalue is more of an issue for those nearing retirement, but you can manage the risk by switching to a more conservative fund,” he said. “Many super providers will do that for you when you’re about to retire, but it’s worth checking out.
“It’s important to see your super as a long-term investment. There will be occasional setbacks along the way.”
Glen McCrea, deputy CEO of the Association of Superannuation Funds of Australia (ASFA), also stressed that Australians need to think long term.
“There is no doubt that it is difficult at the moment, but in terms of people’s pensions, it is worth recognizing that this is a proposal that has been going on for decades,” she told news.com.au.
“It is important not to panic during market declines, as over the 10 years to June 30, 2021, pension fund returns averaged 8.5 percent per year.”
“One of the main benefits of belonging to an APRA regulated super fund is that they have professional managers who spread the investment portfolio across a number of asset classes. This provides a buffer in volatile markets.”
“If you’re concerned about your super, you should talk to your fund because they’re there to help you.”
Stock market chaos continues
After an extremely difficult week in which the Australian stock market collapsed in response to fears of a recession, there seems no quick backlash this week.
The ASX today saw a drop of 0.78 on Monday at noon and there are concerns that there will be more pain for the stock market this week and that sharp losses in the crypto market will spill over to broader markets in the following days.
“As has been the case throughout the year, the main drivers of the stock decline remain high and still rising inflation stemming from pandemic supply and demand disruptions exacerbated by the war in Ukraine and Chinese lockdowns; central banks are ramping up the pace of rate hikes; and the increasing risk that this will lead to a recession,” said Dr. Oliver.
“As always, the most speculative ‘assets’ have been hit hardest, including the pandemic winners of technology stocks (with Nasdaq down 34 percent) and cryptocurrencies (with bitcoin down 70 percent from last year’s high).”
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