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Superannuation and investment – how does it work?
24 Sep 2024
4 min read
Super is likely to be one of your most important investments. But do you know how your retirement savings are managed? We break down how super is invested and what you should consider when it comes to choosing your investment options.
How does super and investing work?
Superannuation is designed to support you in your retirement. In basic terms, most employees are entitled to contributions to their chosen super account on top of their salary except if the employee is under 18 and works under 30 hours per week. Your super fund will then invest these contributions with the aim of making you more money. When your super earns returns on investment, those returns are reinvested. This is what is called compounding and what will help your super grow over time. Super funds generally offer members a range of investment options such as property, shares, infrastructure, cash and bonds. Like all investments, your super balance is likely to go up and down depending on how your investments perform.
Choosing your investment options
Super funds usually let you choose the investment option(s) your money is invested in, and most will also have a default option that you get invested in if you don’t make a choice. Each investment option is generally broken down into asset classes, which can be classified as either defensive or growth assets. Defensive assets include cash, government and high-quality corporate bonds. They tend to provide stability and lower overall investment risk. On the other hand, growth assets, which include shares, property, and real estate investments, come with higher risk but offer the potential for higher returns.
This is where understanding your risk tolerance comes into the decision you make about where to invest you super savings. The table below gives some examples of asset classes that your investment option might invest in, but there are other asset classes which are not listed.
| Asset |
Type |
| Cash (Defensive) |
These assets are deposits held at banks, credit unions and at-call cash accounts. These assets aim to provide a high level of capital security and returns that match or exceed the RBA cash rate. The return on cash is unlikely to exceed inflation over the long term. |
| Fixed Interest (Defensive) |
A mix of quality medium and long-term domestic and global debt issued by companies, governments and government-type agencies. These assets pay regular interest and are held for their stable income stream, low volatility and defensive characteristics, however, in periods where interest rates rise rapidly, government bonds may have negative returns. |
| Shares (Growth) |
This asset class invests in companies listed on stock exchanges. There is exposure to large and small companies across a range of industries. Returns from shares have historically outperformed inflation. The returns from shares are a combination of capital growth and dividends. |
| Property (Growth) |
A portfolio of high-quality, mostly unlisted properties focused on generating high levels of income with the potential to provide medium-term capital growth. From time to time, this sector can have a small allocation to listed property. The portfolio is expected to be less volatile than shares. |
Understanding your risk tolerance
There is risk in all investments, and deciding on what level of risk you’re willing to take will depend on a few factors, including:
What stage of life you’re at
The amount of time you have left before retirement (and what you’re planning do with your superannuation when you retire) is likely to be a factor in your decision because it will influence what level of risk you’re likely to be comfortable with. This will differ for everyone. If your investment timeframe is long, say 20 years or more, you may be happy to invest in more volatile assets, such as shares, as you have time to ride out one or more investment cycles and potentially reap higher returns.
However, if your investment timeframe is short, you may not wish to invest in volatile assets but prefer those such as fixed interest and cash, which are less likely to drop dramatically or generate negative returns in the short term. While the volatility of such investments is generally low, the returns may also be lower than those for more volatile assets.
Your personal circumstances
Superannuation is one aspect of your finances. You might also have other savings, a mortgage, shares or other investments. You may also want to consider your work plans. Are you working more than 30 hours or full-time? Are you anticipating a break from work? All of these are considerations for your super and how you choose to manage it. Your risk profile for investing is likely to change over time, which is why it’s always important to ensure that your investment options suit your personal circumstances.
As a general rule, it’s unrealistic to expect an investment to be low-risk and provide high returns at the same time. You need to decide how much risk (or loss) you can tolerate in pursuit of higher returns. If you want low risk, will you be satisfied with the lower returns that accompany it? The answer will usually be different for everybody, and there is no single correct answer. It is worth taking the time to assess your individual tolerance for risk.
Keep on top of your super
Once you decide on which investment option is right for you, it’s a good idea to keep track of your super. You can do this by logging into your account and checking your balance to see how it’s performing. If your personal circumstances change, such as you stop working or you’re closer to retirement, you may want to review your investment options.
It's a good idea to speak to a Financial Planner to review your personal circumstances and decide which investment option is best for you. You can also book a free chat with an NGS Super Specialist. Our Super Specialists are here to help. They can answer your questions about superannuation, investments, insurance or transition to retirement.
Book your free chat with a Super Specialist
To learn more about investment options at NGS, have a read of our Investment guide.
Investment returns are not guaranteed, and past performance is not always a guide to future performance. The information provided is general information only and does not take into account your personal objectives, financial situation or needs. Before acting on this information or making an investment decision, you should consider your personal circumstances and read our Product Disclosure Statement, Target Market Determinations and Financial Services Guide for more information. You should also consider obtaining financial, taxation and/or legal advice which is tailored to your personal circumstances before making a decision.
