Last updated: 25 January 2021
What you should do with your super in challenging market environments depends on your age and how far away retirement is for you.
Do you have 15-25 years until you retire?
For most members, the answer to what should you do with your super in response to market setbacks is: Do nothing. Market downturns, whatever their trigger are temporary. Every crisis, every downturn, every recession comes to an end bar none.
If you have 15, 25 years or more until you retire, the downturn we saw in 2020 is one of many you will likely experience during your working life. The compensation for accepting this kind of short-term market turmoil is higher long-term returns. And market downturns provide opportunities for Sunsuper and our investment managers to acquire assets at lower prices on behalf of members. That is exactly what we pay our managers to do.
Are you approaching retirement, or already retired?
Even if you’re close to retirement or already retired, your super is still a long-term investment: it’s important to remember that we all hope to live a long time. So, for your balance to last as long as possible, you will likely need to keep some of your money invested in growth assets – including shares. However, it’s generally not a good idea to have excessive exposure to shares as you get older as a sharp downturn just prior to or just after you retire can do significant damage to retirement plans.
If you haven’t made a choice about your super investment strategy, your balance will be invested in Sunsuper’s default Lifecycle Strategy. How does the Lifecycle Strategy work? Until you’re 55, we’ll invest your savings in our Balanced Pool, which has the same mix of shares and other assets as the Balanced option. Once you reach age 55, each month we’ll gradually reduce your exposure to shares. By age 65, you’ll be mainly invested in our Retirement Pool (90%), with some of your balance in Cash (10%). We do this to reduce the impact of market downturns, like this one, on your retirement.
So, if you’re close to retirement or already retired and in our default option or invested in a reasonably conservative portfolio, you may not need to do anything at all in response to market volatility.
However, if you feel you may be over exposed to shares and are very worried about the impact of volatility on your retirement, you may need to consider moving to a more conservative strategy. However, there are two key things to remember:
- The negative share market returns in early 2020 followed years where share market returns were considerably stronger than longer-run norms. Moving to a more conservative strategy now, after markets have declined, will lock in a loss of capital.
- Moving to a more conservative strategy after markets have declined would have locked in a loss of capital.
- A more conservative strategy by its nature delivers lower long-term returns and is not likely to capture the full benefit when share markets eventually (and inevitably) recover.
- World share markets enjoyed very strong returns over the December 2020 quarter, continuing a recovery that began in late March, regaining much of the losses suffered in the downturn earlier in 2020.
What if you're considering a conservative, cash, based strategy?
In this example, a member was aged 65 on 1 July 2007, right before the global financial crisis. They were invested in either the Sunsuper Balanced or Retirement option and retired in October 2007 with $300,000 in super. They either stayed invested in that option, or switched their super balance from the diversified option to Cash on 31 January 2009.
Regardless of their investment strategy, the member took out the minimum pension drawdown percentage each year (5% from age 65 to 74; 6% from age 75). As the graph clearly shows, the member’s balance is significantly higher today if they stayed invested in a diversified investment option through the market volatility rather than moving to a more conservative strategy when the markets fell. In addition, the member's balance at the end of December 2020 has largely recovered from the downturn experienced earlier in 2020.
Retired 31 October 2007 and minimum pension drawdown to 31 December 2020
Source: Sunsuper. Past performance is not a reliable indication of future performance. Assumptions: Member invested in the Sunsuper Balanced or Retirement option, age 65 on 1 July 2007, retired in October 2007 with $300k balance. Either stayed invested in Balanced or Retirement option, or switched balance to Cash on 31 January 2009. Minimum pension drawdown percentage from retirement to today.