Monday, September 27, 2010

Break down of my retirement asset allocation

Finally received my member statement which summarises my retirement fund breakdown.

Unfortunately it's all preserved - meaning, I won't beable to access it until I'm 65 or so. Decades and decades away. Because of this 'you can't reach into the cookie jar' type of control, many of my peers and younger compatriots aren't that interested in contributing extra or trying to maximise contributions. And if we are, it's not up to the $25k limit usually.

Even though it has great tax advantages, locking funds away into super funds can really limit your options in the near future. So when you're undecided about whether to contribute extra into your super funds or not, always consider the short and medium term and whether you will need funds for buying a house, getting married or for a new car. I prefer the way the Americans have structured their retirement funds and the flexibility it has over the OZ structure.

If anyone encountered financial difficulties in America, they can withdraw their retirement funds (at the cost of paying extra taxes), however, at least it can be withdrawn in the first place. Unfortunately for the Aussies, if we encounter any financial difficulties, the most we can access is around $10k and that's after going through rigorous paperwork and having to prove that you're seriously going through hard times and pretty much in arrears on your bills- but you're more likely to be homeless and begging on the street before you can access that $10k.

Here's the asset allocation breakdown of my super/retirement funds:

30% Australian Shares (Risky)
23% Overseas Shares (Risky)
12% Bonds (Semi-risky)
10% Property (Semi-risky)
9% Growth Alternatives (Semi-risky)
6% Cash Securities (Almost risk-free)
5% Defensive Alternatives
(Almost risk-free)
5% Infrastructure (Almost risk-free)

Where 'risky' assets are considered to have a higher possibility of 'actual' asset returns failing to meet and exceed 'expected' returns. With increased risk of course, is the chance of increased returns.

The fund that I have it invested in, is considered to be a 'balanced' type of fund. Pretty much a middle-of-the-road type of fund where it's not too risky that I have massive fluctuations and not so risk-free that I have no gains and no investment growth. Which is perfectly fine for my risk profile. You need to work out your own risk profile before you can decide on which structure is the right one for you.

I don't want to find out next year that it has plummeted 50% and on the other hand, I don't want to discover that it hasn't kept pace with inflation since it was invested in such low yield assets.

With a 5 year average return of 5.52%, it's rather dismal and pathetic.

If you're trying to find a good allocation percentage, the rule of thumb is- the younger you are, the more you can afford to risk, so you can afford to be more heavily invested across stocks(domestic & overseas) and property. If you're older and close to retirement (eg: 50yo and older) then you should probably be rebalancing to something more defensive and less risky, such as more cash securities and cash accounts.

If you're expecting to live until you're 90 and older, you need to bear this in mind and evaluate how much risk you're capable of tolerating before you need your funds. There's nothing scarier than the idea of running out of funds while you're retired and having to rely on social government benefits...and particularly in the future... it's ghastly to contemplate the idea of running out of funds when you're 85yo or something and that there is no social government benefits because the government simply doesn't have any.

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