What your age should say about your super

Significant birthdays are either met with a high level of excitement…or dread.

And the emotional response is generally driven by how high the birthday number is.

So an 18th or 21st birthday is usually embraced as a celebration of coming of age/entry to the adult world with all the accompanying hope for what the future may bring.

The birthdays that follow that mark the start of new decades – the 30s, 40s, 50s, 60s and so on – tend to be celebrated to varying degrees and with at least some level of ambivalence.

There is another way to think about birthdays – as a personal financial planning and investment tool.

Discipline is a key part of any investment strategy. The challenge of staying the long term course when there is so much else going on in the world is something most investors grapple with.

Recently, a family member had all the fun – and expense – of celebrating her 21st birthday. Somewhere in the midst of the celebration, sage advice was offered that she should review her superannuation fund balance and investment strategy at her 50th birthday party.

Fair to say that free piece of financial advice did not make the social media highlights reel.

But age is an important input into any financial plan.

For a young person with (hopefully) more than 40 years till retirement, a growth/high growth asset allocation makes good sense.

There is much about the Australian superannuation system that is world class, if not world-leading. But one common criticism is about the level of “engagement” by fund members. Given its mandatory, near universal coverage of the workforce, it is not surprising that the majority of fund members are in the “default” or MySuper product category.

The challenge with engagement is that it is often measured by the number of fund members who are actively choosing investment options from the fund's investment menu.

While that sounds reasonable, there is a considerable body of research that says when members choose their own investment options they actually underperform the professionally managed default offerings.

So perhaps the better measure of member engagement is how well they understand their fund's default offer, or even if they chose that particular fund because of what the default offers.

The typical default MySuper fund has a static asset allocation – meaning it is the same whether you are 21 or 65 – and classified in the growth category with a 70/30 growth/defensive split. But some funds take a more aggressive approach and because it is up to each fund to determine what they classify as defensive assets and growth assets, the offers can vary considerably.

In contrast, the US 401(k) retirement system is undergoing a significant shift in the way the default funds are managed.

In 2017 around 51 per cent of the default offers in US 401(k) plans are so-called target-date offers.

This is really putting your birthday to work on an institutional scale. These funds set the asset allocation mix between growth and defensive assets based on your age.

So for our 21 year old, the growth/defensive split would typically be in the range of 90 per cent growth/10 per cent defensive. Using Vanguard's glide-path as a guide, that asset allocation would begin to take a more defensive stance after that 50th birthday. By the time you are 65 the blend is 55 per cent growth/ 45 per cent defensive.

The logic is simple enough – when you are young you have time on your side to ride out even dramatic market movements like a global financial crisis, so you can afford to be more aggressive and hopefully be rewarded with higher returns for having taken the higher level of risk.

When you have just celebrated your 60th birthday, and perhaps begun thinking about retirement, dramatic market falls can severely impact your retirement savings pool and then time becomes more of a concern than it does a friend.

Some Australian super funds have implemented target-date approaches to their MySuper offer but the take-up has been relatively low compared to the US system.

So perhaps when you next celebrate a significant birthday it is worth investing the time and engaging with your super fund to understand what the default asset allocation is and whether it lines up with your stage of life.

Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
26 March 2018
vanguardinvestments.com.au