How to ride the assets lifecycle

Changing your investment allocation as you age makes sense … and there are different approaches.

Summary: As one gets closer to retirement, it makes sense to change your investment allocation to protect your nest egg. There are now lifecycle options in some super funds that automatically shift allocations at set age intervals. But self-directed investors, such as those running their own fund, can achieve a more measured outcome by carefully managing income and contributions.
Key take-out: Lifecycle products are designed to improve the superannuation experience for investors who have made no asset allocation decisions at all, and have just stuck with a default fund.
Key beneficiaries: General investors. Category: Asset allocation.

Lifecycle investing is one way to manage asset allocation decisions within a portfolio, matching the amount of risk (exposure to growth assets like share) with a person’s age and stage in life.

As a person ages, the assumption is that they are less suited to growth assets, and these are reduced in the asset allocation of the portfolio.

Lifecycle investment products were marketed heavily in the 1990s, and are seeing a revival as the ‘MySuper’ option chosen by a number of superannuation funds (the Government has allowed trustees of superannuation funds to use a lifecycle investment option as their single investment strategy for a MySuper fund).

This strategy is a solution to the problem of disengaged superannuation investors who simply leave their investment in a default fund – usually a balanced super fund. A lifecycle fund will change their asset allocation, and reduce their exposure to growth assets, as they age.

It is often hard to even understand what a ‘balanced’ fund is – some have 50% exposure to growth assets, others more than 75% – so making asset allocation decisions around this for an investor who simply wants a zero thought default option is going to be challenging. A lifecycle approach looks to at least adjust this allocation for an investor to match it to the general needs of people at the same age.

With the global financial crisis leading to 50% downturns in sharemarkets around the world, balanced superannuation funds in Australia lost up to 40% of their value. This was a difficult event for superannuation investors close to retirement who had not made any deliberate investment choice, with their superannuation accumulation funds sitting in default ‘balanced’ accounts.

The Q Super Example

As an example of a lifecycle fund, Q Super has informed members that if they have their funds sitting in the default balanced fund, and if they don’t opt out, they will have their superannuation balanced automatically transferred to the Q Super Lifetime Fund, which looks to adjust the asset allocation of members portfolios as they age.

Q Super uses three groups:

Aspire Group 1 – those under age 58.

Sustain 1 – those over 58 with $300,000 or more in superannuation.

Sustain 2 – those over 58 with less than $300,000 in superannuation.

The Aspire Group 1 strategy aims to achieve a return of 3.5% above the rate of inflation after fees and taxes (say a 6.5% return in a 3% inflation environment), and shows an illustrative asset allocation of about 30% defensive assets (it uses the phrase ‘capital preservation seeking assets’) and 70% growth (‘higher return seeking assets’).

This would seem to be in line with many ‘balanced funds’.

The Sustain 1 strategy aims to provide a return 1.5% above the rate of inflation after fees and taxes. The illustrative asset allocation is about 60% in capital preservation seeking assets, and about 40% in higher return seeking assets.

The Sustain 2 strategy has about 80% of assets in capital preservation seeking assets.

Is a lifecycle approach a good idea?

In critiquing this approach, we should be very careful to acknowledge who this strategy is designed for. It is designed to improve the superannuation experience for investors who have made no asset allocation decisions at all, and just stuck with a default fund.

A lifecycle approach adds some sophistication to the way funds work for them – making some adjustment of asset allocation.

However, if adjusting asset allocation as a person ages makes sense, then why not do it in a more sophisticated way rather than in just two or three phases? For example, why not reduce the growth assets by 5% at age 50, a further 5% at age 55, a further 5% at age 60, and so on? A single stage adjustment at age 58, as proposed by the Q Super model, would see a fund with a $400,000 balance effectively move from having 70% ($280,000) in growth assets to 40% ($160,000) – an effective sale of $120,000. This would be great for an investor if it happened in September 2007 when sharemarkets were at their peak, but the outcome would be very different if it occurred at the bottom of the market in early 2009.

Further, many investors at age 58 will live another 30 years. There has never been a 30-year period of investment returns in Australia’s history where defensive assets like cash and bonds have outperformed shares. Will changing to lower-risk but lower-return assets position a portfolio that might provide an income stream for 30 years where it is less likely to cope with inflation and the demands of providing an income stream?

It should be repeated that the audience for these lifecycle funds are investors who have never made a deliberate asset allocation decision themselves. So a move to protect them from volatility as they get closer to retirement certainly has its merits. But any person who wants to take more control over their superannuation can make their own asset allocation decisions rather than being forced into a lifecycle fund.

For self-directed investors

Asset allocation is a crucial decision for self-directed investors, and the idea of a lifecycle approach to asset allocation is worth consideration. It also can be implemented in a sophisticated way.

Whatever the target asset allocation is at retirement – and I think a target of 40 to 45% in cash/fixed interest investments is often a good one as it allows eight years of drawings at a rate of 5% of the portfolio value per year – a person can work backwards from the target level to build that allocation.

Assuming an average after-tax/after-fees income for a superannuation fund of about 4% a year, this is the amount that you can roughly expect to increase your defensive assets by per year if you simply take the income earned and invest it in cash and defensive assets. This growth in defensive assets can happen more quickly by using additional contributions to increase the cash and fixed interest investments.

So, if you are 10 years from retirement with a portfolio that has 20% of investments in cash and fixed interest assets, increasing that allocation to cash and fixed interest by 2% a year will see your portfolio comfortably at the 40% cash/fixed interest exposure by retirement.

This is done without having to sell assets, by simply using the income and contributions to build this part of the portfolio. Given a moderate level of superannuation contributions (and often close to retirement, people are making additional contributions), you are likely to have some money available for the purchase of growth assets. In this way you have adjusted your portfolio to give you the ready access to cash that you need at retirement, similar to a lifecycle approach, without having to sell assets to get there.


A number of superannuation funds have adopted a lifecycle approach to investing, as a way of helping investors who don’t make any investment decisions to preserve their capital prior to retirement.

For self-directed investors, the decision to adjust their asset allocation to match their income and liquidity needs is important – and can be done by carefully managing the income and contributions of a superannuation fund.

Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor.

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