Aussies are likely to get a nasty surprise at the end of this financial year when they take a look at their super sales.
A nasty surprise may await Australians at the end of this fiscal year when they review their pension balances.
The money Australians put into their funds is invested in stocks and bonds, the idea being that they grow over time to find a healthy balance for their future pensions.
However, if you’ve been paying attention to what’s been happening in the economy in recent weeks, you might have noticed that all is not well in the stock market.
Australian stocks took a huge 6.6% hit last week, representing a massive 15.3% decline from all-time highs seen in April.
Superannuation funds are not only invested in the Australian stock market, with the majority of funds adding a mix of bonds, offshore equities, property, infrastructure and other alternative assets to the mix, which means there is less risk in the event of an ASX crash.
However, the impact of the current global financial chaos – stoked by soaring inflation, high interest rates and fears of a recession – is such that experts warn Australians are facing a ” double whammy” on their super sales.
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Some are warning of hit rates of up to 5.5% when Australians open their year-end financial statements in a few weeks.
For someone with $147,425 in their superannuation fund – the national average amount an Australian has, according to the Association of Superannuation Funds of Australia (ASFA) – they could hit a whopping $8.1,000 hit. $ to his retirement savings when he opens his statements this tax time.
Extreme market volatility hit the super bottoms in aprilwith the median growth fund down 1.2%, but Shane Oliver, chief economist at AMP Capital, believes that sharp falls in the Australian stock market since then will see funds fall by as much as 5%.
“The average is expected to drop by 4-5%,” he told news.com.au. “It’s disappointing as it would be the biggest drop since GFC in 2009, where they lost around 13 per cent.”
He said super funds have faced a “double whammy” this year as bond values have also been hit hard.
Bonds are issued by governments and corporations when they raise debt, usually with the promise of a fixed interest rate or coupon for a specified period.
Dr Oliver said they typically account for around 25-30% of investments in super funds, with equities accounting for around 60%.
But like stocks, he said the value of bonds had also been hammered, saying they had suffered their worst financial year since the 1970s.
Why You Shouldn’t Panic
While a 5% drop in your retirement savings might sound worrying, Dr. Oliver said it’s important to put it into context.
“Equity markets are quite volatile, so there is always a risk that they will fall,” he said. “But you have to remember super is for your retirement, which means it’s a long-term investment spanning decades. It will be an investment of at least 20 years for most of us.
So while there is likely to be a dip this year, it has been offset by years of very strong super fund growth.
Last fiscal year, for example, the median super fund swelled by 13.4% and in 2019 it grew by 14.7%.
Dr Oliver said the average fund has grown by 8.5% over the past 10 years and that a 5% drop this fiscal period would bring that figure down to 8.3% – which he says is “ always a pretty good return”.
Additionally, he said there is an upside to the decline, as those who continue to invest in their supers during the recession will get more for their money, as stocks are cheaper.
This, he said, can help your fund grow faster in the future.
“The drop in super value is more of an issue for those very close to retirement, but you can manage the risk by switching to a more conservative fund,” he said. “Many super-providers do this for you when you’re nearing retirement anyway, but it’s worth checking out.
“It’s important to think of your super as a long-term investment, there will be occasional setbacks along the way.”
Glen McCrea, deputy chief executive of the Association of Superannuation Funds of Australia (ASFA), also stressed that Australians should think long term.
“There’s no doubt things are tough right now, but in terms of people’s retirement, it has to be recognized that this is a decades-old proposition,” she told News. .com.au.
“It’s important not to panic during market downturns because in the 10 years to June 30, 2021, pension fund returns have averaged 8.5% per year.”
“One of the main benefits of belonging to an APRA-regulated super fund is that it has professional managers who diversify the investment portfolio across a number of asset classes. This helps provide a buffer in volatile markets.
“If you’re worried about your super, you should talk to your fund because they’re there to help.”
The stock market chaos will continue
After an extremely difficult week which saw the Australian stock market plunge in response to fears of recession, there appears to be no quick rebound this week.
The ASX saw a 0.78 drop today at 12 p.m. Monday and there are fears that there will be no more pain this week for the stock market and that heavy losses in the crypto market will have a effect on broader markets in the following days.
“As has been the case all year, the main drivers of the equity slide remain: high and still rising inflation resulting from pandemic supply and demand distortions compounded by the war in Ukraine and lockdowns. Chinese; central banks accelerating the pace of interest rate hikes; and the growing risk of it triggering a recession,” Dr Oliver said.
“As always, the most speculative ‘assets’ are the hardest hit, including pandemic gainers in tech stocks (with the Nasdaq falling 34%) and cryptocurrencies (with bitcoin down 70% from from its peak last year).”
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