What are they, how do they work, and should you choose one for your default MySuper investment strategy?
In life stage investments you are assigned an asset allocation based on your age.
They are designed to insulate older fund members against the impacts of a sudden fall in capital markets when they are nearing retirement.
The way the asset allocation changes as you get older is known as the lifecycle investment's glidepath trajectory.
Lifecycle superannuation products are investment choices where the asset allocation is determined by how old the member is or how long they have until they expect to retire. Lifecycle investments are very popular among MySuper products available through retail superannuation funds, especially those run by banking groups. Some not-for-profit funds have lifecycle investments as well.
The idea behind lifecycle investments is that when you are young you have a long time until you retire so you should be comfortable taking more investment risk with the expectation that you will achieve higher investment returns. But as you get older, particularly in the decade leading up to retirement, you become more focused on preserving your capital so you lower your investment risk by reducing your exposure to growth assets like shares and property. This is done by having more of your superannuation savings switched across into defensive assets like bonds and cash.
In practical terms this means when you are under age 40 your exposure to growth assets will average almost 82% before progressively reducing to an average of 63% by the time you are in your 50s. By age 65 when most people retire the average lifecycle MySuper product has about 45% of its portfolio invested into growth assets. This is illustrated in the graph.
Are lifecycle investments safer?
Lower investment risk doesn't come without potential cost however. This is because when you choose a lifecycle investment, because as you get older more of your account balance is allocated into defensive assets, it means that over your superannuation life your portfolio is more conservatively invested than if you had chosen a traditional single strategy diversified growth portfolio. The way this could impact your account balance is that when you are older and have a larger account balance the lower expected investment returns delivered from a typical lifecycle superannuation product designed for older age groups means you will not get the same compound interest boost as fund members invested into a traditional diversified growth portfolio.
As a result, for a lifecycle strategy to pay off you are in effect betting the investment markets will fall sharply in the years approaching your retirement. How you feel about these investment risks determines whether you should choose to leave or remain in a lifecycle investment strategy.