How this boring and simple retirement portfolio beat the big super funds?

It’s that time again when super funds post their annual results. It’s also a time where fear of missing out, FOMO for the cool kids, kicks into overdrive.

For some people this means chasing performance in order to get them ahead financially.

This rarely achieves the desired result many are hunting for.

So, today I want to explore some of these results further and provide some context around how you should approach investing as you head towards retirement.

How did we compare to the BIG super funds in FY24?

Financial year 24 super performances are starting to filter through. After a backdrop of ho hum financial news, the results were surprisingly good.

Including our boring and simple portfolio built with funding retirement income in mind…

Here are the results:

If we review the performance numbers over FY24, super fund E was the best performer followed by super fund A, B, C and D respectively.

But we can’t look at these performance numbers on face value. There’s a certain level of risk taken by each super fund to achieve these types of returns.

Here are their risk levels:

Based on risk levels, super fund A had the highest level of risk with 81.76% allocated to risky investments. Followed by super D with 81.50%, B with 80.40%, C with 68% and lastly super fund E with 60%.

Based on investment fundamentals, the greater the level of risk you take, the greater the return you should be accepting.

Based on this logic, super fund A should have proved the best super, but looking at the raw numbers that is not the case.

What does risk mean?

The fluctuations in which your investments could move in value. The higher the level of risk the greater the movement in values. The lower the level of risk, the lower levels of movements you’ll expect.

What super fund would you choose?

I’m curious, on this information alone which super fund would you choose?

I’m taking a wild guess here, but maybe you would have chosen super fund E.

Why?…

Well, for a lower level of risk, you would have received a higher return than super A for which you would have accepted approximately 36% more risk for a lower return.

Doesn’t quite make sense, does it?

Let’s lift the lid on the names of these super funds:

In fact, super fund E which is our super boring and simple portfolio built for retirees. One that allows clients to confidently draw down their level of income safely which avoids having to sell growth investments when investment markets go down. It’s designed to preserve clients funds for as long as possible.

Unlike the BIG super funds, there’s no fancy investment strategy, nor investment managers, taking a bet on what will be the next best thing or based on crystal ball gazing.

Nor is there any stock picking…

It’s easy to get caught up in the financial media on the news or internet. It’s financial noise most of the time. You have little to no control over these aspects of investing.

So, why would you ever try to make decisions on things you can’t control? It doesn’t make logical sense.

Our investment philosophy has always been based on what we call, “evidence based investing”.

Based on real research from years of examining how investment returns are achieved. From this research it’s been proven that the majority of investment returns are delivered via the assets you hold.

In other words the amount you allocate to asset classes such as cash, bonds, Australian shares, International shares and property will drive the return you achieve.

Not stocking picking or some complicated investment strategy.

This can be achieved by simply using index funds. Index funds represent a pool of investments, such as the ASX top 200 companies. Whatever that index generates in returns, it is the return you receive. Pretty simple, hey…

However, we have deliberately made a few adjustments to account for some risks in the Australian market.

It’s not an overly complicated investment strategy, and by keeping it simple, it still beat many of the biggest super funds in this country. But you won’t hear it plastered all over the TV or internet. We just don’t have the marketing budgets these guys have…

Even the Barefoot Investor recently made a comment that most of the BIG super funds should move to an index approach. Imagine the money pouring back into members’ super balances then…

Optimising for performance will not give you the confidence you’re looking for in retirement

Why? Quite simply everyone’s retirement is different.

It may be a BIG mistake to make investment decisions for retirement based solely on investment returns alone.

Why? If you do, you put yourself at risk of depleting your assets at a rapid rate. Before you know it, you’ll be looking at your balances and wondering what went wrong.

There’s a very good reason why this happens. Through your working years, it’s all about accumulating wealth and maximsing your investment returns. This is where the focus is for the big super funds.

That’s the whole point of super…

You’re trained this way over a 20, 30 or 40 year career. To build financial assets, take on risk and generate the highest possible return.

Through your working life, you have your regular income to rely on. There’s no need to draw on your other assets such as super to fund your income and lifestyle requirements.

That can all come crashing down if you don’t make the appropriate adjustments as you approach retirement.

As retirement approaches, you enter what I call the “DANGER ZONE”. It’s the period 5 years prior to retirement and five years post retirement.

Any missteps or bad decisions in this period may cost you your retirement lifestyle. It’s extremely difficult to come back from bad decisions in this “DANGER ZONE”.

This includes not preparing your super appropriately for when investment markets go down.

Is optimising for investment returns the key to retirement planning?

For many people investing is all about maximising investment returns. Taking on risk to generate high returns. After all, why would you take all that risk if there was no reward?

But, I’m guessing you’re not a spring chicken, or at least on the outside…

Which means all your investment experience has been influenced by one action, accumulating money over your working life.

The basic rules of investing encourages you to take risks. For any given level of risk, you’ll receive a commensurate investment return.

Aiming for high returns in your retirement years exposes you to the risk of running out of money sooner that you had expected.

Therefore, you need to think differently and adjust your investment strategy as you approach retirement and enter the “DANGER ZONE”.

If running out of money in retirement is a BIG concern for you, why would you risk your retirement keeping the same investment strategy as you did in your working years?

The way you prepare and plan for retirement is different to your working years. Your priority turns to how you can extract a comfortable level of income in retirement without putting you at risk of running out of money.

It’s a delicate balancing act…

Which means you need to think methodically about what you are planning for in retirement. You need to reverse engineer it all and determine how you’re going to extract enough money safely through your retirement years so you don’t get into trouble financially.

There are many inputs and outputs to consider in a complex equation…

Don’t be fooled, super funds are a little like supermarkets…

That’s right, you have your major’s like Coles and Woolworths. They essentially sell the same things. Then you have Aldi, no frills with lower prices and less service.

Super funds are a little like supermarkets…

You’ve got the ones that have a lot of options on offer and others which have a handful of options and very little choice.

Most super funds are well suited for the accumulation phase of life (working years).

However, when it comes to the income phase (retirement), you need to consider carefully the one you use. You simply can’t base your decision on investment returns alone.

Choosing a super fund for your retirement phase…

There’s no right or wrong answer here.

What works for one may not necessarily work for the other. It going to depend on your retirement strategy and required income flows.

When choosing the right super fund for your circumstances, it requires you to take a step back and determined what your needs and requirements are.

Here are critical decisions you must make to ensure you choose the right super fund leading into through your retirement:

#1 Define you goals. I know this one might sounds obvious, but many miss key important steps and pick the super fund without any regard for what it needs to deliver for you.

#2 What does your retirement cashflow requirements look like through all phases of retirement? This will involve understanding when you will require income and at what level through retirement. For most, the go-go years will be the most expensive.

#3 Feasibility of your retirement plan. Miss this critical step and you put yourself at risk of running out of money. If you have more than enough, you may run the risk of not experiencing more while you are fit and healthy. Don’t miss this step as it will put a spotlight on your blindspots while helping to determine the investment return you need to be aiming to achieve to make your plan work.

#4 What investment return do you need to achieve to make your plan work? This will dictate the way you allocate your money across different asset classes. You’ll understand this better by knowing the feasibility of your plan under various assumptions.

#5 What investments do you need access to, to be able to build your retirement income portfolio? It generally will not be a one investment option…

#6 What super fund will be able to facilitate and give you access to the most appropriate investments to house your retirement income portfolio? Not all super funds have access to the investments you will need.

#7 Are the fees of the super fund cost effective?

#8 Is the administration of the super fund efficient, timely and reliable?

After two decades of experience in the retirement planning space. I’ve found that too many people miss this critical step. They put the cart before the horse.

They make decisions based on their current knowledge of super in their accumulation phase without considering the changes in their income phase of retirement.

To be honest, I’m agnostic when it comes to which super fund to use for clients. As I said earlier, super funds are like supermarkets. You need to find one which is going to meet your needs.

The problem is, you don’t know what your needs are until you analyse all the inputs and outputs of your retirement plan.

Once you have built out a well thought out methodical plan, then and only then can you focus on the most appropriate financial product for your needs. That’s even if you need one.

It’s a little like finding the right engine to put into the body of the car to drive you safely through retirement. One that’s going to go the distance…

If you would like clarity around how much is enough for a comfortable retirement for you, confidence you have the right plan and have control over your retirement direction.  Book your Retirement Clarity Call by clicking here. We’ll have a chat about your retirement challenges, provide some insights and a roadmap to give you more clarity confidence and a control.

P.S. We are not in the business of selling investments or investment schemes. We are solely here to act as a guide to help you live your best life in retirement so you don’t have to worry about running out of money.

Glenn Doherty – CFP – Financial Planner | Retirement Planning Specialist |Retirement Planning Made Simple for aspiring happy lappers and avid travellers within 7 years of retirement

We work with people in Adelaide and around Australia virtually via zoom!

Financial Planning financial planning adelaide Retirement Retirement Planning Superannuation