Super vs Shares: Which is right for you?

If you’re looking to invest your money, you may want to build on your superannuation through additional voluntary contributions. Alternatively you may decide to build your own portfolio through the share market.

Determining which approach is right for you will come down to your own financial situation and goals. Here’s what you should be asking yourself before deciding.

When do you want to access your investment?

Given that superannuation is designed to provide an income during retirement, you generally cannot access your super until you reach a certain age. This is referred to as your ‘preservation age’ and varies depending on what year you were born. For anyone born from 1 July 1964, their preservation age is 60.

Keeping in mind these restrictions, the timeframe of your investment (how long you expect to hold it before selling) is an important factor that you should consider. Investment time frames can range from short-term (just a few days or months), to long-term years to decades).

If you need to access your investment before your preservation age, then investing outside of super would generally be the better option. However, if you’re investing for your retirement and are comfortable with not using those funds until you reach your preservation age, it may be worthwhile to invest additional money in your super.

You should also consider how long you are able or want to remain employed. If you retire early, or significantly scale down your workload, you may not be eligible to draw down on your super.

Everyone’s circumstances are different, and you should seek professional financial advice to see what option is best for you.

Are you on track to have enough super for retirement?

According to Association of Superannuation Funds of Australia (ASFA), the average superannuation balance needed at age 67 for a ‘comfortable’ retirement is $690,000 for a couple and $595,000 for a single person. The Federal Government’s Moneysmart website has a superannuation calculator that helps calculate how much super you’ll have when you retire based on your age, employer contributions, voluntary contributions, and fees. This can be useful for planning how much you may need to contribute to your super to reach your retirement goal.

How diversified is your portfolio?

We’ve all heard the phrase ‘don’t put all your eggs into one basket’. If we change this to ‘don’t put all your money into one investment’ we’d be talking about diversification. Every asset that you buy comes with the risk that its value could drop. By spreading the money in your investment portfolio across different assets, it can reduce the risk that all of them will fall in value at the same time.

Super is typically a diversified investment since it invests in a range of different assets. Buying one or two different shares, however, is not a diversified investment. Even if you own shares from many different companies but they all fall under the same sector, you would still be lacking in diversification. Of course, investing in shares outside of superannuation doesn’t rule out a diversified portfolio. Exchange Traded Funds (ETFs) are an excellent and inexpensive way to achieve diversification because they give you instant exposure to stocks from many different companies.

What is your investing experience?

Picking individual shares is hard. Even the most experienced investors can get it wrong, not to mention the time and effort that goes into researching and monitoring companies. For investors with little expertise that want to save for their retirement, investing into super (which is typically highly diversified and managed on your behalf), may be the way to go.

However, there are also many other ways to invest in the share market outside of super that doesn’t require you to pick stocks. ETFs, as mentioned above, are one such option. You can also invest through managed funds if you don’t want to go and buy shares on your own. Micro-investing apps can be a great option for people looking to invest in a diversified portfolio of ETFs  without any experience required. They are also a good opportunity to gain first-hand investing experience by starting small and building up your confidence over time.

Before investing into any of these products, it’s important to read their Product Disclosure Statement (PDS) to understand the risks and fees and to determine if it’s suitable for you.

Potential rewards and risks

When weighing the rewards and risks of investing in superannuation versus shares, it’s crucial to consider both the potential benefits and the pitfalls associated with each option. Contributing to your super can offer tax advantages, such as lower tax rates on earnings within the fund. Additionally, investing in super often provides a diversified portfolio managed by professionals, reducing individual risk. On the other hand, investing directly in shares can offer higher potential returns, especially if you are able to identify promising stocks or sectors. However, this approach comes with greater risk, including market volatility and the need for ongoing research and management. Both options come with their own set of risks, such as market fluctuations for shares and the restriction of access to funds in super until retirement. Ultimately, the right choice depends on your financial goals, risk tolerance, and investment timeframe.

What about tax?

Both investing into your super, and directly into the share market, carry certain tax implications.

Earnings on investments within your super fund are taxed at 15% during accumulation phase (i.e. before you reach retirement). This includes interest and dividends, less any tax deductions or credits. Capital gains made on share market investments outside of super are generally taxed as part of your income, which may be higher than the 15% taken from super earnings.

There’s a fair bit of nuance involved with tax in and outside of super, and determining what is right for you will depend on your unique situation. Consider talking to an accountant and/or a financial adviser to better understand how each will affect your financial position.

Cover image source: RomanR/Shutterstock.com