A report commissioned by industry superannuation fund AustralianSuper last year revealed that a young person who chooses a ‘very low-risk’ superannuation investment option could be up to $170,000 worse off in retirement than if they choose a ‘medium to high-risk’ option.

So what exactly are low risk and high-risk options? Cash and fixed interest are typically lower risk, as they are about income and not capital growth.

Property and shares on the other hand, whether domestic or international, are at the higher-risk end as they are more about the growth and underlying value of the asset class.

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Young investors should be aggressive

Bruce Brammall, managing director at Castellan Financial Consulting, encourages young people to invest in riskier growth options.

“Today’s 30 year old is going to have a 50- to 60-year super investment to manage. You should be as aggressive as you can possibly stand to be. You’ll recoup the losses easily. People in their 20s, 30s or even 40s should have 70% to 100% of their fund in property and shares, and the remainder sitting in cash and fixed interest.”

Brammall says the commonly touted balanced fund option – 60% in growth assets and 40% in income assets – is only one aspect of a diversified portfolio.

“[There should be] more diversification within a particular asset class instead of multiple asset classes.”

While Tracey Norris, director of superannuation services at Pitcher Partners, echoes Brammall’s thoughts on young people’s superannuation fund options she is more in favour of a balanced fund across various asset classes.

“To have all your resources in one place puts you at greater risk of losing everything if the plan goes awry… you should limit your exposure to complete investment failure,” Norris says.

She uses the example of cash and property, which generally trend in opposite directions: property generally performs well when cash returns are low and vice versa.

The table below is collated from the AustralianSuper research and shows projected outcomes for a person with 40 years to retirement, earning an annual income of $52,000 and with $24,000 in superannuation.

Investment option Proposed standard risk label Projected most likely balance Projected maximum balance Projected minimum balance
Cash Very low $175,925 $203,443 $151,312
Balanced Medium to high $354,178 $670,936 $188,092

Self-managed superannuation funds (SMSFs) are an ideal structure for financially savvy individuals who want more autonomy and flexibility with their investment options, but the minimum balance requirement of $200,000 often means this option is out of reach for most 30-somethings.

Instead, Brammall says most younger people would be better off investing in an APRA-regulated fund and starting a SMSF when their super balance is at least $500,000.

You could also consider a super fund that offers tailored investment and delivers similar outcomes to an SMSF, but without the trustee responsibilities and cost.

Increasing life expectancies and your investment

People approaching retirement are generally advised to revert to a less aggressive super investment strategy, but both financial experts say increasing life expectancies complicate when exactly this switch should take place.

“At 50, you may still live for another 35 to 40 years and your retirement savings have a long investment timeframe ahead, therefore a lower-risk strategy may not be best,” says Norris.

Brammall shares Norris’s sentiments.

“When you’re between 50 and 60, you might have anywhere between $200,000 and $800,000 in super. You need to start protecting your super and need to start becoming more defensive with the assets you’re invested in. Older people should be in a balanced fund.”

Although the recent global financial crisis (GFC) negatively impacted retirees’ confidence, with many of their superannuation account balances falling sharply, Norris says that as long as you didn’t pull out all of your money, your funds would have recovered.

“In our experience, many of those most affected by the GFC were those who lost courage and liquidated their equity holdings after the market hit bottom and they did not re-enter the share market for a significant period into the recovery.”

By doing this, retirees realised what would otherwise have only been “paper losses” in many instances.

The following table is Norris’s “loose rule of thumb” for investment asset allocation across various lifecycle stages.

Investor Growth assets Defensive assets
Gen Y 80% 20%
Gen X 70-80% 20-30%
Baby Boomers 50-60% 40-50%

Whichever asset allocation you choose to follow, it is important to assess your tolerance for risk – are you a cautious or a reasonably assertive investor?

As Norris says: “Personal investment strategies are as different as experiences at the theme park. One individual may only ride the adrenaline-pumping rollercoasters, while another may prefer the sedate steamboat ride.”

For an investment strategy to be successful, it must meet your objectives, complement your risk tolerance, meet your desired rate of return and satisfy your liquidity requirements.

This article looks at super in a general way; if you need specific advice regarding your situation, you should consult an appropriately qualified and registered professional.