The idea of boosting your super when your balance is dropping may seem counter intuitive. However, by delaying making your contributions, and depending on your situation, you may be missing out on the opportunity to buy units in your investment portfolio, at a lower cost.
What does that mean? Your super account is made up of units
These units cost a certain amount of money. When markets have fallen like they have recently, those units are lower in value than when the markets rise. This means you buy more units with your super contributions when the markets are low than when they are high (assuming you are still using the same dollar amount to purchase units). This means that by regularly investing the same amount rather than investing a lump sum every now and then or stopping and starting contributions, you’ll buy less when prices are high but more when prices are low. The result is you average out the dollar cost of your investment and you eliminate the need to pick the markets.
For instance, if a unit in the Growth portfolio was worth $4.44497 and you invested $1,000 you would have bought around 225 units. When the markets are down and a unit costs $4.03315 that same $1,000 buys you around 248 units. When the markets recover those units also increase in value, so you have therefore grown your super account by the value of the additional units.
As super is a long-term investment, short-term volatility provides the opportunity to buy investment assets when they are low, and then benefit from the potential future increases in the years and decades to come. However, we don’t advocate “timing the market”. Continuing to contribute funds into super on a regular basis could also reduce volatility over the long term.
If you stop making extra contributions, you may also stop benefiting from the tax concessions you could receive from making pre-tax contributions.
If you are looking to boost more of your super and did not reach your $27,500 concessional contribution cap in the 2021-22 financial year, you may be eligible to carry forward the the unused portion as a ‘catch-up’ contribution. This will allow you to make a larger contribution above the cap for the first time in the 2022-23 financial year.
When deciding if making additional contributions is right for you, you should consider what is appropriate for your age and financial situation, the investment timeframe, your risk tolerance, and retirement goals.
Money that goes into super is preserved until you reach your preservation age (for most people this is in your 60s depending on your date of birth). This means you can’t access it unless you reach your preservation age and meet a condition of release. Therefore, consider whether you can afford to go without the funds you contribute, as you may have a long lead time on accessing those funds.
For more information about contributions click below or give us a call on 1300 033 166.
Join a webinar
Our Chief Investment Officer, Graeme Miller is also presenting a webinar called, 'Your volatility questions answered' in July 2022. You’ll hear from Graeme about how markets have recently performed and what the coming year may bring.