Retirees, battered and bruised over shrinking nest eggs, should consider alternative investment strategies to traditional asset classes to build savings, according to finance experts. The key is to be proactive and match risk profile to personal circumstances. Other options include waiting for global financial markets to recover, which they will, returning to work, or adjusting your lifestyle in line with financial reserves.
Alex Dunnin, of financial services researcher Rainmaker Information, says retirees and those approaching retirement should consider investing in infrastructure projects, “real” property and private equity. He’s not for a minute suggesting investors abandon traditional asset classes, but says unlisted assets can be complementary in rebuilding or reversing shrinking retirement savings.
Dunnin, a director of research, says global stimulus packages are squarely aimed at infrastructure projects to kick-start ailing economies, and astute investments should generate consistent (positive) returns. Dunnin says the MTAA, a top performing Australian industry fund, is a good example of thinking outside the traditional investment square. He says the MTAA is benefiting from investing in the Mildura Base Hospital, airports and other big transport infrastructure – a visionary capital growth and income strategy on behalf of trustees.
“The Mildura Base Hospital investment offers income, potential long-term capital growth and can be seen as socially responsible,” Dunnin says. “The fund can genuinely say it’s investing in the community, while maximising returns for members.” Dunnin says Statewide Super based in South Australia invests in Polish ports, so it generates consistent income from docking fees. He says super funds prepared to invest in commercial, industrial and residential property, or private equity projects can make significant capital and income gains over time if astutely managed. Macquarie Airports earns fees from airlines and retailers, while Transurban, the owner of Melbourne’s CityLink and roads in the US, generates tollway revenue. Smart fund managers are looking to invest in overseas infrastructure projects to complement limited opportunities in Australia.
Dunnin says what seems to be forgotten during the global financial crisis is that super is also a long-term investment for many retirees given increasing life expectancy. So it may be entirely appropriate for retirees to think long-term capital growth when it comes to investing. Retirees should examine their super portfolios and broaden their investment strategies commensurate with risk. It may mean switching to a fund that offers a wider array of investment opportunities than the traditional asset classes.
Which brings Dunnin to another point. He says the global financial crisis has highlighted flaws in investment strategies that slashed super funds by an average 25 per cent in the past 18 months. Relatively high exposure to global equities, that’s widely blamed for stripping retirement nest eggs, prompts Dunnin to challenge the concept of diversification. Dunnin asks: “Are you really diversified because you’re invested in Australian and international equities? I don’t think so. You can own Australian, US, British, European, Chinese and Japanese equities and the result’s the same – losses. The US equity market sneezes and the rest of the world catches cold. The same principle applies to listed property trusts on global exchanges. The trouble is too many fund managers are obsessed with daily valuations. Super is meant to be a long-term investment, yet, in too many cases, it’s governed by short-term considerations.”
Dunnin says retirees have to come to terms with the average super fund losing 25 per cent in the past 18 months. “I know investors are going through a grieving process, but the important question and strategy from here is what can I control?” Dunnin says. “That’s the focus. If preserving existing capital is the objective, then accept the losses and put the balance in fixed interest products and cash.” Those delaying retirement in hope of a recovery shouldn’t exit shares now as it appears they are close to or may have bottomed. Examine the shares in your portfolio and weight towards the big proven performers as they generally recover more quickly. Dunnin and other experts say sharemarkets will recover, and super remains the most tax-effective vehicle to generate retirement savings.
But, in the meantime, negative returns are shaking the confidence of members who are responding by cutting voluntary contributions to managed super funds. Total super contributions (employer and voluntary) fell from $170 billion in 2007 to $120 billion last year, and may decline to $100 billion this year, according to Dunnin. A loss of confidence in fund managers has prompted more investors to start self-managed super funds. Dunnin says investors tempted to start a self-managed super fund must be prepared to do the research, while keeping up to date with legal and administrative requirements.
Finance planner and investment adviser Gerard O’Shaughnessy says struggling retirees aged 65-plus may be eligible for a part pension depending on the value of income and assets. He also suggests a thorough examination of member super funds, saying it’s most important to have exposure to quality Australian equities producing income. Don’t wait for non-performing stocks to recover; many don’t. It’s the wrong time to sell entirely out of equities, but weight more towards cash and fixed interest “if you want to take some risk off the table”.
O’Shaughnessy, of Carroll Pike & Piercy says super fund members aged 55 or more should consider taking advantage of a transition-to-retirement pension. The strategy enables members to keep working, but earnings in their super fund become tax-free. Their salary and the pension that’s required to be taken allows them to continue topping up super.
Jeff Bresnahan, managing director of SuperRatings, urges retirees and fund members aged in their late 50s and early 60s to seek independent financial advice on their existing fund’s performance and investment strategies. Appetite for risk determines the investment strategy that passes the “sleep-at-night” test. Astute asset allocation, be it listed, or investing in a London car park or Cuban energy company, drives performance. Bresnahan says the MTAA, a constant out-performer in the past, has more than 40 per cent of its super invested in unlisted assets. The MTAA was the first Australian super fund to invest heavily in unlisted assets, he says.
“Retirees, and all super fund members, should focus on what you can control and fees are most important,” Bresnahan says. “No-one should be paying more than 2 per cent in annual fees, but plenty do.” He says a much better performing fund, with cheaper fees, may be several hours study and a signature away.
Bresnahan suggests those nearing retirement salary sacrifice as much as they can to cash if they’re concerned about market performance. But he is against long-term over-weighting in cash as the returns are modest in a lower interest-rate environment. Also, if inflation moves higher, cash returns will fall in real terms. Super fund members should remember that equity markets can recover quickly, so they risk missing any upside by exiting shares. Bresnahan adds: “And just because you’re 65, overweight in cash is the wrong strategy,” He says those looking forward to a long retirement will probably require a mix of capital growth and income assets.
Despite global meltdown, Bresnahan says $100,000 in super in 2003 was worth $135,441 in Janaury 2009 and that’s ignoring contributions. In October 2007, it was considerably higher at $174,040.