How to manage your super in a COVID-19 world
The COVID-19 pandemic is a once in a generation event that has brought greater volatility and uncertainty to financial markets. It is natural to have some concerns about the implications for your financial future and super balance, particularly if retirement is on the horizon.
However, severe as they can feel at the time, events like this are not permanent. In fact, history shows markets do bounce back from major financial shocks, including the global financial crisis (GFC) and epidemics like SARS and swine flu.
Here we address some key areas to consider when it comes to thinking about your super in a market downturn.
Remember that super is a long-term investment
Outside of the family home, super is the largest investment most Australians will make in their lifetime, so it is important to take a planned and informed approach.
It is the nature of investment markets to change rapidly, and pre-retirees will have witnessed a number of market shocks in their working lives - from the 1987 stock market crash to the bursting of the tech bubble in 2000 and the GFC in 2008. What is important to note, however, is that markets do eventually recover in time.
So before deciding to make significant changes to super, such as switching your super to cash or other defensive assets, it is important to remember that you could not only be locking in a loss but could also miss out on the market gains when share markets do bounce back.
Be aware of your risk tolerance
One silver lining from COVID-19 is that people are more engaged with their finances and superannuation. Unexpected events and sudden shocks can hit at any time, so this is an opportunity to ensure your asset allocation within your super is appropriate for your age and risk tolerance.
Your individual risk tolerance is something that can change over time. A younger investor, for instance, may have a higher risk tolerance as they have decades to ride out the market highs and lows, while a more mature investor may have a lower tolerance for market volatility.
This is why is it important to regularly revisit your investment strategy as your needs change. Your investment strategy should take into account your long-term retirement goals and the expected performance of your investments over longer periods of time.
Having a clear investment strategy will help resist temptation to make changes based on short-term market fluctuations. Speaking with a financial adviser about your risk tolerance and individual situation may help with this.
Find ways to grow your nest egg
If your super balance has fallen as a result of COVID-19, or if you have accessed your super through the Government's early access scheme, you may want to look into ways to add to your fund if feasible, in order to keep your retirement goals on track.
- Contribution splitting allows you to have some of your super paid into your partner's account. You can generally split the after-tax amount of your concessional contributions from the prior years (up to your concessional cap), such as employer and personal deductible contributions, as long as your partner is below their preservation age (set out by the ATO) or below 65 and not retired.
- The downsizer superannuation contribution allows older eligible Australians to sell their home and make a contribution of up to $300,000 each to super with the proceeds. To access the scheme you must be 65 or older and meet the eligibility requirements. The downsizer contribution will count towards your transfer balance cap, which applies when you move your super savings into retirement
- Salary sacrifice is an agreement between you and your employer to pay some of your pre-tax salary into super. This is often really tax effective. Super contributions are taxed at 15% (and up to 30% if your income is over $250,000) rather than your marginal rate, which might be up to 47%.
- Personal deductible contributions are another option. These after after-tax contributions for which you can claim a deduction to achieve the same outcome as salary sacrifice. If your total super balance is less than $1.6 million, you can make personal contributions of up to $100,000 a year (or $300,000 over three years under the bring forward rule).
- Spouse contributions allow you to help boost your partner's super savings. You may be entitled to claim an 18% tax offset up to $3000 that you make on behalf of your non-working or lower-income partner, as long as they haven't exceeded their non-concessional contributions cap for the financial year or have a higher super balance.
Share markets by their nature are volatile, which means they go through ups and downs. However, volatility is usually a short-term problem.
While the ride may be a bit bumpy, it is important to remember that investors who stay focused on their investment strategy generally have a greater chance of achieving their goals.
If you are unsure about the best course of action, you can speak with a financial adviser, or your super fund can point you in the right direction of educational resources and information.
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