In this first series of ‘Ask the Experts’ articles, we sat down with Tribeca Advisor David Lofthouse to talk about the impact COVID-19 is having on superannuation and the outlook for the future.
How has superannuation been impacted by COVID-19?
What we did see was a very severe reduction to share market prices when COVID first hit. The ASX 200 (which most people will have some exposure to in their Super) lost about 30% of its value between February and March. But since then it’s recovered more than half of that reduction – so a short, sharp dip; followed by a short recovery.
For context, during the Global Financial Crisis (GFC), the ASX200 lost about 50% of its value over the course of 2008, but this was over a 12-month period. The drop was more prolonged, and so was the recovery afterwards. In fact that recovery resulted in consistent growth over the next decade, leading to a record high which occurred just before COVID.
Obviously it’s hard to predict when and how the market will fully recover and grow out of COVID given the volatility and unpredictability of the crisis, but history shows it will recover.
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What does this mean for someone in their 30s, compared to someone close to retirement?
The overarching principles of managing superannuation really should remain the same throughout your life. And that is having and understanding a long-term strategy, and to stay resilient and maintain the course when there are changes that impact the economy.
The key driver in the returns and the performance of superannuation is your allocation between what we call defensive assets like cash and bonds, and growth assets like equities and property. Your stage of life should be reflected in the mix between growth assets and defensive assets, balanced with your level of comfort and need for investment risk.
For example, generally when you’re younger you can afford to take more risk with Super, as at the end of the day it’s there to fund your retirement. Someone in their 30s is more likely to be better suited to a focus towards growth assets, as over the long-term they can expect to see higher returns, riding out the movements of the economic cycle along the way.
For our clients who are closer to retirement, a more conservative strategy is typically a more appropriate Super mix – say 70% invested in defensive assets and 30% exposed to growth assets. So while they may see a bit of a correction to their Super during an event like COVID, it won’t be like the level of volatility that a more growth-focused portfolio is experiencing.
It highlights how important it is to be really clear on your superannuation strategy and be comforted that you know where things are headed in the long-term.
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What can we learn from how Super has performed out of other times of economic crisis?
Stay the course. In the GFC, many people panicked when they saw the share market drop by 50% and moved their investments to cash and bonds. Investment manager Vanguard did a great piece of research around this. It showed that at the bottom end of the fall, if you moved your assets from a conservative allocation (70% defensive, 30% growth assets) to 100% cash, over ten years your compounded return would have been 37%. Whereas if you left it in that original diversified allocation with 30% remaining invested in growth assets, your ten-year return would be 176%.
By far and away the most important principle to take out of this is to know your strategy and have faith in this strategy when an unexpected event like COVID happens. In that way you’re already prepared for that level of risk, and it’s factored into how you’re investing so you can move forward with more certainty and comfort. And you know your ship is built to weather the storm.
What do people need to be aware of if they access their Super early through the $10K option? Would you recommend it?
There are absolutely going to be some people who are in a position of financial hardship, who need to access their Super to make ends meet. But it should be seen as a last resort. Your superannuation is there for your retirement and that’s why there are strong restrictions around when you can access it.
Unfortunately, there’s cases where people are withdrawing the funds who aren’t in the financial hardship position and have been opting to withdraw the funds and use them for discretionary spending rather than necessities. Like for gambling, purchasing household electronics, or topping up their savings.
I heard about one person who withdrew $4,000 – not the full $10,000 – to pay for furniture. To illustrate how damaging the impact of withdrawing your Super early can be, consider this. If you purchased that furniture by using a credit card (which we also wouldn’t recommend) and only made the minimum monthly payments based on typical interest rates, it could take 30 years to pay off and cost over $13,000 all up. I think any reasonable person would agree that’s a horrendous outcome and should absolutely be avoided. But even worse, if you took the $4,000 out of your Super, over the same time period and with a rate of return of 6.5% per year after costs you’d be losing out on $26,000 – twice as much!
What this shows is the impact of taking Super out early can be really severe. That’s why the early withdrawal from Super option has to be used only as a last resort as it can really hurt you in the long run.
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What advice would you give someone worried about their Super?
The most important thing with Super is that it’s there for the long-term, whether you are still working and actively contributing, or if you’ve retired and drawing a pension from it at the moment. The economy will recover. You will start to see growth returns on your Super again.
When, we can’t say as there’s so much uncertainty in Australia and around the globe currently. But it will recover because we’ve been here before.
What COVID has highlighted is the importance of having a Super strategy in place. If you don’t have one, it’s never too early or too late to reach out to an advisor, whether you’re in your 20s or 60s. The aim is to really understand what it is that your Super is invested in and look at that against your current life stage and goals, and make sure it’s the right fit for you.
Australians are incredibly resilient. I look at the year that we’ve had with the bushfires and flooding and now the COVID situation, and there’s been a lot stress and uncertainty. If you throw that into the mix, along with the volatility in investment markets, it’s easy to understand how people can feel uneasy about their Super. But use that resilience that you’ve got to take steps to understand what’s happening and how you’re exposed to it.
And be reassured that there’s no need to panic.
If you would like to discuss your superannuation situation or need financial advice on any matter, we’re always ready to chat. Please talk to your advisor or arrange an appointment with one of our Tribeca Tribe here.
Want to hear more from our experts? Click here to see our recent Ask the Experts Webinar where we asked our panel to discuss ways of maintaining our financial and emotional wellbeing during a crisis like COVID.