Lifecycle superannuation products
Lifecycle superannuation products are investment choices where the asset allocation is determined by how old the member is or how long they have until they expect to retire. Lifecycle investments are very popular among MySuper products available through retail superannuation funds, especially those run by banking groups. Some not-for-profit funds have lifecycle investments as well.
The idea behind lifecycle investments is that when young super fund members are young they have a long time until they retire so they should be comfortable taking more investment risk with the expectation that they will achieve higher investment returns. But as they get older, particularly in the decade leading up to retirement, the member becomes more focused on preserving their capital so they lower their investment risk by reducing their exposure to growth assets like shares and property. This is done by having more of their superannuation savings switched across into defensive assets like bonds and cash.
In practical terms this means when a member are under age 40 your exposure to growth assets will average almost 82% before progressively reducing to an average of 63% by the time they hit their 50s. By age 65 when most people retire the average lifecycle MySuper product has about 45% of its portfolio invested into growth assets. This is illustrated in the graph below.
Are lifecycle investments safer?
Lower investment risk doesn't come without potential cost however. This is because when a member chooses a lifecycle investment, as they get older more of their account balance is allocated into defensive assets, it means that over their superannuation life their portfolio is more conservatively invested than if you had chosen a traditional single strategy diversified growth portfolio. The way this could impact their account balance is that when they are older and have a larger account balance the lower expected investment returns delivered from a typical lifecycle superannuation product designed for older age groups means they will not get the same compound interest boost as fund members invested into a traditional diversified growth portfolio.
As a result, for a lifecycle strategy to pay off they are in effect betting the investment markets will fall sharply in the years approaching their retirement. How a member feels about these investment risks determines whether they should choose to leave or remain in a lifecycle investment strategy.
This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.
Last modified: Friday, November 13, 2020