Shares chaos hits boomers

Those whose working lives are drawing to a close must be wondering how much further their living standards in retirement are going to fall given the mayhem on share markets of the past weeks.

By InvestSMART · 12 Oct 2011

By InvestSMART ·
12 Oct 2011

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Those whose working lives are drawing to a close must be wondering how much further their living standards in retirement are going to fall given the mayhem on share markets of the past weeks.

Three years on from the onset of the global financial crisis, older super fund members continue to pay the price for their funds' high exposures to sharemarkets.

The turmoil is not a problem for those with 10 years or more in the workforce. Markets will bounce back and shares provide better returns than other asset classes over the long term. But it's a different story for those at the end of their working lives.

The way most of the financial services industry sees it, older workers and even retirees should continue to maintain fairly high exposures to shares. With 20 or 30 years in retirement, they argue, there is plenty of time to ride out the markets' ups and downs.

But most of the baby boomers embarking on retirement or already in retirement have small account balances. Compulsory super commenced only in 1992.

These older fund members have not benefited from compulsory super for all of their working lives. They do not have enough savings to provide an adequate buffer to ride out big share market falls. It means many retirees will have to rely on the age pension in part or in full to help them make ends meet.

The majority of super fund members are in the "default" option - the option contributions go in to when no choice is made. But these are designed for the "typical" fund member not those at either end of the age spectrum, the fund members in their 20s who can afford to take on higher risk and those in their 50s who cannot afford to take on too much risk.

These so-called "balanced" options usually have about half of their money invested in shares, the highest allocation to shares among OECD countries.

Super funds have other investment options available to members and older members should at least consider whether they should switch to an option with a smaller exposure to shares and a larger exposure to lower-risk investments.

The lower-risk options go by names such as "conservative" or "stable" but there is no standardisation for such labels and members should check the asset allocations first.

Any decision to switch needs to be well considered rather than driven by fear. Super funds can now give limited advice to their members over the phone for free.

For those concerned about their super, making contact with their fund should be the first step in getting more information and becoming better informed about their options.

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Frequently Asked Questions about this Article…

How are recent share market falls affecting baby boomers' retirement savings?

Recent share market falls hit older workers and baby boomers hardest because many have high exposures to shares but relatively small super balances. That combination means market downturns can significantly cut retirement savings, and some retirees may end up relying partly or fully on the age pension to make ends meet.

Should retirees stay invested in shares or switch to lower‑risk superannuation options?

Financial advisers often say shares outperform over the long term and can suit people with 10+ years until retirement. But for many boomers with small super balances and little capacity to ride out big falls, it can be sensible to consider lower‑risk options. Any switch should be well thought through — not driven by fear — and based on your personal time horizon and savings level.

What is the 'default' superannuation option and why might it not suit older members?

The default option is the investment choice where contributions go when members don’t make an active selection. These defaults are designed for the 'typical' member, not those at either age extreme. Older members near retirement may find the default’s risk level (often a balanced approach) is too high for their situation.

What does a 'balanced' super option usually mean for shares allocation?

A balanced option typically invests about half of its money in shares. This is among the highest share allocations for default options compared with other OECD countries, so it can expose members to significant market volatility.

How can I reduce my exposure to share market risk in my superannuation?

Many super funds offer lower‑risk options labelled things like 'conservative' or 'stable' that increase allocations to cash and bonds and reduce share exposure. Because these labels aren’t standardised, check the actual asset allocations before switching to confirm they match your risk tolerance and retirement timeline.

Is now the right time to switch my super investment option because of market turmoil?

Switching during market turmoil can make sense for some, especially if you’re close to or in retirement with limited savings. However, the article stresses decisions should be carefully considered rather than driven by fear. Review your options, check asset allocations, and get information from your fund before making a change.

Can my super fund provide advice if I’m worried about my retirement savings?

Yes. Super funds can now give limited advice to members over the phone for free. If you’re concerned about your super, contacting your fund is a practical first step to get more information and become better informed about your choices.

If I have a small super balance, will I need to rely on the age pension in retirement?

The article notes that many older fund members didn’t benefit from compulsory superannuation for their whole careers (compulsory super started in 1992) and so have smaller account balances. As a result, a number of retirees may have to rely partly or fully on the age pension to help meet living costs.