Young Australians urged to take higher risks in superannuation for better long-term returns

Oh, to be young again – it’s a common thought but some of the challenges the young face now would tax even the experience and wisdom of some people who are much older.

Fortunately, one of the biggest financial challenges facing young Australians should be very easy, simply by making sure their generally higher risk tolerance in life is mirrored in their superannuation.

In one of the more interesting pieces of research done on the superannuation of younger Australians, Innova Asset Management looked at APRA data and found many have a much lower level of risk in their super portfolios than they should.

Most of that is be explained because they simply park their super in a default MySuper product but that can be a very large mistake that will significantly curtail future retirement plans.

Going all equities ramps up returns

By upping the risk level a little and using an all-equities portfolio, spread across Australian and international shares, the returns beat the average default superannuation product by 13.6% over the past decade.

That is a really significant amount when you consider the number of years left to compound and is really only a straightforward acknowledgement that the young are better able to cope with the odd negative return that an all-equities approach can bring and have plenty of time to recover from any hiccups.

More risk equals more reward

Innova managing director Dan Miles said the main reason default superannuation products were underperforming an all-equities portfolio was because “insufficient risk was being taken,” and that “many can afford to take on more risk”.

That is because Australians under the age of 40 account for more than 10 million MySuper accounts, indicating an investment timeframe of 25 to 40 years before their superannuation becomes accessible.

“The problem of being allocated to a superannuation offering that is not in line with an investor’s long-term goals is growing and suggests there is a great opportunity for financial advisers to expand into a younger client base to advise younger Australians on taking on higher equity risk investment options, which are more likely to deliver superior long-term returns,” Mr Miles said.

Plenty of opportunities to change accounts

“Younger Australians who are by default investing in MySuper products would be better off with financial advice. This represents an opportunity for financial advisers to offer more affordable and scaled financial advice to young Australians.”

Further analysis of the numbers showed that almost 250,000 Australians aged 30 to 34 years old hold between $100,000 and $499,999 in MySuper accounts and more than half a million Australians aged 35 to 39 years old also have that amount range invested in MySuper accounts.

Mr Miles said with investment in property getting more difficult for younger people, it was even more vital to build up a bigger super account to ensure a healthy retirement.

Defensive balanced funds can be a costly mistake

The vast majority of MySuper products are intended to be low-cost and simple products and are usually balanced funds with a fixed 70:30 growth-defensive asset mix.

“MySuper products were designed to cater for a largely disengaged customer base given superannuation’s distant payoff,” Mr Miles said.

“Those least likely to be engaged – and so invest in default MySuper products – are young people with lower education, those on lower incomes and people with lower financial literacy.

“However, even younger Australians on higher incomes with relatively higher levels of retirement savings remain invested in lower-returning MySuper products.”

The natural conclusion is that younger Australians need to get more engaged with their super and ensure that their fund risk level is appropriate for them.

That still may involve a pre-set and low-cost super fund but perhaps with a growth or high growth label rather than the more catch all and defensive “balanced” fund.