THE government ensures that employers put 9 per cent of your earnings into a qualifying superannuation fund. But then what? Most Australians have no idea how the financial markets operate, yet they're supposed to have enough insight to invest their 9 per cent so they have an income in retirement.
This has been made more difficult by the global financial crisis and, in the past few years, Australians in typical superannuation funds have watched their retirement savings dwindle.
The superannuation guarantee has contributed $1.3 trillion to funds under management, which is bigger than the market capitalisation of the ASX.
However, most Australians admit they know nothing about investing so they select the "default" option in their industry fund or the big commercial super funds run by banks and life companies.
These default options usually see a member's money put into what they call a "balanced" fund. Balanced might suggest that your fund is split into quarters, with near-equal allocations going to fixed interest, property, cash and equities.
But look at an Australian balanced fund at any of the big fund managers and you'll find they have about 60 per cent in equities, 15 per cent in property, 10 per cent to 13 per cent in cash and 10 per cent to 13 per cent in fixed interest (government and corporate bonds).
The problem with this is that when you have 60 per cent of your retirement savings in equities - and half of that is volatile global shares - you're unwittingly riding on a roller-coaster that is having its rules changed month by month.
Fund managers like to point to their charts and show you what happened to the US Dow Jones Industrial Average after the great crash of 1929 and after the Second World War and after the oil crisis of the early 1970s. The graph goes up and up and up, which means retirement savers are supposed to keep putting their money into the sharemarket.
The graph gives us a sense of equities being a science. But it might be flawed.
First, when it comes to the GFC, the world of finance might be reordering itself permanently into a more conservative outlook, and retirement plans based on annual returns of 10 per cent are unrealistic.
Secondly, the graphs that show the Dow Jones always recovering to outdo itself don't take account of timing. Retirees don't get to hang on in volatile sharemarkets until the Dow regains the ground it has lost. They need funds to live on they need cash in the bank.
One of the issues I've been thinking about for retirees and retirement savers is that the more stable fixed-interest allocations are too low in this country. A balanced fund should be much more strongly weighted to fixed-interest investments - at the expense of equities - because the bond markets are more stable than the equities markets and they spin off regular interest payments. Yet, at the same time, fixed interest returns only slightly less than equities.
There are many ways of measuring bonds and equities but, essentially, since 1980, Australian government bonds have made the same returns to investors as Aussie shares, but with nowhere near the volatility. Corporate bonds have returned more than Aussie shares.
And don't be fooled by arguments that bonds are not "productive" in the economy: they fund the same endeavours as equity.
Just so no one thinks I'm alone on this, remember that David Murray (chairman of the Future Fund), Ken Henry (former treasury secretary), ASIC chairman Greg Medcraft and former minister of finance Lindsay Tanner have all expressed concerns about Australian superannuation's emphasis on equities and its light weighting to bonds.
So what do you do? This should be about taking control of your investments and control of the volatility you want to live with.
My first recommendation is to see a financial adviser. If you do, make sure you ask about fixed-interest investments and investigate if they are right for you.
Secondly, approach your fund manager and inquire about a better risk-return equation, where you might earn slightly less but without the same risk. They might have a better fund for you with a stronger weighting to fixed interest.
Thirdly, taking control might mean starting a self-managed super fund (SMSF). There is lots of compliance and auditing associated with these funds. You probably need $200,000 in super to make it worth it and you need the right accountants and solicitors. But a SMSF lets you invest where you want to.
Whichever way you choose to take control, remember: it's your super - it's your retirement.