This article is published by Modoras Pty Ltd ABN 86 068 034 908
How your super assets add value to your retirement
When you’re saving for your retirement, you have to make decisions on which assets to invest in. If your super is held in a retail fund, this could be as simple as choosing a risk profile and the fund will do the rest. If you’re an SMSF investor you have more choice over where your investment goes and you’ll need to choose assets with the best opportunity for return and capital gains. According to SuperGuide in September 2016, the three most popular assets for SMSF investors were direct shares (30.3%), cash (24.8%) and direct property (15.4%). These three classes combined made up 70.5% of all SMSF investments in Australia in September 20161.
Investing in cash, or the beauty of compound interest.
Albert Einstein is attributed with calling compound interest the ‘eighth wonder of the world’. It’s certainly an amazing concept. Investopedia describes it as ‘generating more return on an asset’s reinvested earnings2’. Put simply, if you continue to reinvest the interest you earn on your savings, you will compound your earnings significantly, with no extra effort on your part.
One of the most important things to remember about compound interest is the earlier you start saving the better. This is because the sooner you begin to invest, the sooner you’ll start being paid interest which, when reinvested, compounds the earnings on your investment. Choosing a term deposit that pays interest frequently may also speed up the growth of your savings.
Business Insider’s Andy Kiersz shows in graph form, the benefits of starting to save early. In his example, both Emily and Dave put aside $200 per month at 6%, but Emily starts saving at 25 while Dave doesn’t start until he’s 35. Overall, Emily contributes $96,000 while Dave contributes $72,000. This $14,000 difference in contributions translates to a difference in final balance of about $200,000 (close to double Dave’s final total) at age 65.
Investing in shares
Shares may offer great returns to investors but their growth is not as safe and steady as the cash investments shown above. Shares are more volatile, which means their value may increase suddenly, increasing the value of your investment dramatically, but just as easily may drop in value, even to the extent that your investment becomes worthless. Before investing in shares, make sure you do your homework and take advice from a professional. Look at what the company does, its annual report, whether it’s profitable, what it has planned for the future4. Base your choice on careful analysis of which shares you think may provide capital growth.
Shares may also provide income via dividends, and many investors look for high dividend paying shares to increase their retirement income. There are also tax advantages conferred by franked dividends. Larger companies like banks are more likely to pay good dividends but may not offer as much in capital growth. Companies who choose not to pay dividends and instead reinvest profits into the business often create strong capital growth4 and a sound investment.
If you wish to compound your earnings in a similar way to compound interest, you can always use your dividends to reinvest in more shares. This is offered by many companies and is called a dividend reinvestment plan (DRP). Your new shares are still subject to the same ups and downs of share prices so your investment could be a total winner…or not, it all hinges on the share market5.
Putting your money in property
Investments in property yield two types of return, one is via rental income from your tenants. The other is capital gains from your property (ideally) increasing in value over time.
Property isn’t as volatile as shares, but neither is it as reliable as compound interest. A good investment property might increase in value but it also may stay the same or lose value. It could earn you rent at the same time, but there’s a risk it could have periods of vacancy. Even when tenanted, the rent may or may not be enough to cover your mortgage payments6. Property isn’t very liquid either, both shares and cash are easier to use or convert to cash in your account at short notice.
Dedicated property investors use the equity they’ve built up in their existing property to purchase more investment properties. This is the property equivalent of compound interest. Too much exposure to property is just as risky as too much exposure to any asset, but you can purchase in diverse locations to spread the risk.
Multiple investments in property is not for everyone. Less bullish investors might choose to keep their property portfolio smaller and limit their exposure. Property is best considered a long-term investment and one that (done with due diligence) may result in decent capital growth. In Australian metropolitan areas, it’s rare for property prices to go down over time, but it does happen. For example, units on the Gold Coast lost 17.9% of their value between 2008 and 2013. (Source: rpdata – Rismark 2013).
Start early and invest diversely
Most SMSF investors have an exposure to these three popular asset classes. Spreading your retirement fund across a range of assets is a prudent way to save for retirement. Taking advantage of the ability to compound on your earnings is also a wise move, no matter which asset you’ve chosen. And most importantly, give compound interest time to work for you. Start early and give yourself as much time as possible to build up a healthy superannuation balance for retirement.
If you’d like some help with deciding on the asset classes that will best suit your investment strategy, contact the experts at Modoras on 1300 888 803 for some sound investment advice.
Over to you
When did you start saving for retirement? Do you wish it was earlier? Have you got compound interest working for you? Let us know in the comments.
Want to learn more about investing for your retirement? Are low risk assets as safe as they seem?
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This article is published by Modoras Pty Ltd ABN 86 068 034 908 AFS and Credit License No. 233209. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). While every effort is made to ensure that the information is accurate, users must be aware that some information may not be accurate or is no longer current. No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.
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