What is a life-cycle super product? And do you need one?
Super can be confusing and it’s easy to avoid the questions, stick with the same fund you’ve always had and just get on with it. But it pays to know about new trends in the market – especially if they can make you more money. Life-cycle super products are becoming increasingly popular and statistics from the Australian Prudential Regulation Authority (APRA) show that almost 30 MySuper funds have life-cycle investment strategies as their default option and many more have it as part of their overall investment portfolio. So what is a life-cycle super product?
Essentially, life-cycle products involve the super company moving your balance across different investment pools based on your age. Your money will be focused on growth while you are young and move toward more conservative, low-risk options as you get older. The strategy allows you to take on more risk while you are younger and have more time to adjust to the fluctuations of the market. Then, when you are winding down your career and have amassed a significant balance, low risk investments ensure that your money is secure. Once you’ve chosen the life-cycle option you don’t need to do anything – your fund will handle all the changes for you.
These type of funds are increasingly popular because of the way they time risk. A balanced fund might provide a higher return over the long term, but a market downturn could mean that your balance is low right when you need it the most. During the financial crisis many retirees suddenly found that their super nest egg just didn’t exist anymore and there was no time for them to build it up again. Gradually reducing your risk over time is a prudent way to minimise your chance of switching investments at the wrong time, such as after a major fall in equities.
But there is a potential downside. Some critics argue that focusing on high growth investments when you are young, and have less money in your account, leads to a lower return overall. Then, when your balance is high, your funds won’t be working as hard as they once did.
Is life-cycle super for you? As with all super products, it depends on your circumstances. You’ll need to consider your age, employment status, super balance and assets before you make any changes. If you’re in your early 60s and plan to keep on working, life-cycle could give you a greater percentage of growth investments until you switch to more conservative options. Speak with your super fund or financial adviser to find out what will best suit you.
Related links:
How to calculate the bank balance you’ll need to retire
The weakening Aussie dollar could be harming your super
Is the government going to raise the age when Australians can access super?