"I am retiring in the next 5 years and I'm worried we are heading for another GFC? What should I do to protect my Superannuation?"
- Question from Greg in Longreach, QLD
Top answer provided by:
Dishna Wijenayake
Hi Greg,
Getting closer to retirement can be a daunting experience, particularly due to market volatility. I’m glad you are planning ahead for your retirement as most leave it till it’s too late.
Regarding protection, some superannuation providers offer the option to protect your capital or income. These products are designed to protect your capital/income if the market falls. However, this feature will come at an additional cost. Therefore, with these products sometimes costs overweigh benefits.
Your super is invested in both growth and defensive assets. Growth assets have the potential to deliver higher returns over the long term. They have a higher volatility. (i.e. shares, property, infrastructure). Defensive assets are generally less volatile but may deliver lower returns over the long term (i.e. cash and fixed interest). If majority of your super balance is invested in growth assets, it is likely to fluctuate more.
If you are hoping to retire in the next 5 years, I recommend reviewing your retirement goals to check how you are tracking.
What is your expected retirement income?
Reviewing your retirement income regularly over the next 5 years is very important. This will ensure that your cash flow needs in retirement are met. If there are any concerns about achieving the desired level of income, these can be addressed, and adjustments can be made accordingly.
Can you maximise your super contributions to boost your balance further?
If you are retiring in 5 years, maximising your super contributions can be a tax effective strategy to grow your retirement savings further. However, you should review your cashflow needs as any additional funds contributed to super cannot be accessed until a condition of release is met.
Can you reduce or pay off existing debt before retirement?
If you can pay off or significantly reduce your existing debt before retirement, most of your retirement income can be used to fund your lifestyle instead of paying off debt. This strategy will reduce your risks further.
Have you reviewed your Insurance cover?
Do you hold any insurance policies through super? High insurance premiums can erode your super balance. Therefore, it is important to review these policies to ensure they reflect your changing circumstances (i.e. reduced debt levels, reduced cashflow needs due to children moving out of home etc)
Have you reviewed your super ‘asset allocation’?
As you get closer to the retirement date your risk tolerance usually goes down. This is because the main concern after retirement is protecting your capital. It’s important to make sure you have a well-diversified portfolio. Having too much money invested in shares or other growth assets when you are a few years away from retirement can increase the risk.
Are you applying for Centrelink benefits upon retirement?
If you are hoping to apply for the age pension, are you familiar with gifting rules, asset test and income test.
To conclude, unfortunately we can’t predict if and when the next GFC would occur, but markets can be volatile regardless. As mentioned earlier, some super providers offer products that allow capital/ income protection, but these come with higher fees.
Reviewing the asset allocation to diversify your portfolio, maximising contributions, reducing/eliminating debt and revisiting your cash flow needs are some actions within your control.
I recommend contacting a financial adviser to review your retirement goals and superannuation. This would help put things into perspective and gauge how you are tracking towards your retirement goals.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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