We’re always told how important it is to stick to a budget and save money. But budgeting (and saving) is only one side to the personal finance equation. The other, equally important side is deciding what to do with the money you have saved. If you’re looking to invest, you may find yourself wondering whether you should invest directly into the share market or add the money into your superannuation.
Here are some things to consider before deciding whether to invest your money directly into the share market or through your superannuation.
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 is an important factor that you should consider. An investment timeframe refers to the total length of time that you expect to hold an investment. Investment time frames can range from short-term, just a few days or months long, too much longer-term, potentially spanning 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 are seeking to invest for your retirement and are comfortable with not seeing those funds until you reach your preservation age, it may be worthwhile to invest in your super. You should also consider how long you are able/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 for some time.
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Are you on track to have enough super for retirement?
According to ASIC’s MoneySmart, in order to support a ‘comfortable’ lifestyle in retirement, it will cost singles $44,146 per year, or couples $62,269 per year. MoneySmart also has a superannuation calculator on their website that helps calculate how much super you’ll have when you retire based on your age, employer contributions, voluntary contributions, and fees. This is useful for tracking how your super is performing and in planning how much extra you may need to contribute 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. So, 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 does not mean you can’t have a diversified portfolio – you simply have the additional labour of seeking out diversification on your own. 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. Investing apps like Raiz allow you to easily invest your money and remove traditional barriers to investing like high entry costs and brokerage fees. Before using any of these products, it’s important to read their Product Disclosure Statement (PDS) to determine if it’s suitable for you.
What about the tax implications?
Both investing into your super, and directly into the share market, carry certain tax implications. Talk to your accountant about the potential tax impacts each alternative may have on your position.
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