In response to these changes, most financial experts advise securing investments outside of super as a supplementary or replacement source of income for pension or early retirement.

While super funds currently allow for a tax-free income stream for retirees who have reached pension age, most investment structures are taxed. However, it is still good advice to consider both options as a source of extra income and for the sake of diversification.

Will super be enough to cover retirement years?

The answer to that depends on the person’s current age, income, health, lifestyle, life expectancy, the type of retirement aimed for, how much their contributions are and the type of investments in the fund.

To put it simply, even if a person maximises the allowable contributions for super, it’s difficult to say for sure how much is enough when medical conditions, inflation and unforeseen circumstances come into play.

Unless a person owns their company to ensure job security and doesn’t plan on ever being in a relationship and have kids, they will have expenses to cover throughout their working life. A super will not be able to help with those.

When push comes to shove, they may end up being allowed access to their super contribution because of some serious financial issues. However, those circumstances are limited to situations that no one would wish to be in.

The best way to ensure that super contributions stay intact is to set up an investment or two outside of superannuation.

How it works

There are many investments to choose from depending on a person’s objectives, risk tolerance and willingness to keep track of their investments.

But regardless of where you invest your money, make sure that you rigorously research about it and, if necessary, seek the advice of a financial expert. Your main objective in investing outside of super is to grow your retirement nest egg and enjoy a comfortable lifestyle once you stop working. You must learn about the opportunities that will work for you and possible challenges that may put your investments at risk.

The golden rule to investing is to diversify where your money goes. Do not just put your funds into one investment. There are different investment types you can consider. With the help of your financial adviser, you can effectively determine which investment would best supplement your super.

Investing all your money in a single vehicle carries high risks. If the investment fails and all your money is invested on it, you can lose all your funds, threatening the stability of your retirement savings.

But with a diversified investment portfolio, your investments can be better protected, as you lower the risk that any individual holding or security might bring. It guarantees that your entire investment portfolio will not sink all at once when one or a few of your investments are not performing well.

However, over diversifying your portfolio can be risky as well. If you are working with a financial expert to handle and manage your portfolio, he or she can warn you about the limitations in diversification.

By understanding how investments outside super would help boost your retirement income stream, you can ensure that you’ll have adequate funds that will allow you to materialize the kind of retirement you want.

Make sure to work closely with your financial manager to ensure that your investments will not just be diversified, but also balanced, which guarantee better returns. Take note that since one person’s circumstance differs from another, it’s best to discuss options with a professional who can help create the most effective portfolio.

To know more about your investment choices, here are some options to consider:

What are my investment choices?

Managed funds
This is the easiest type of investment because investment fund managers do most of the heavy lifting. Professionals are the ones responsible for diversifying the investment portfolio and selecting individual investments (shares, bonds, etc.) in exchange for management fees.

Cash
Some may be tempted to just stash their cash in the bank, but doing so would only make them more vulnerable to the effects of inflation.

For those who must keep their money in cash form, consider depositing it in a high-interest savings account or a certificate of deposit, also known as term deposit (TD). This way, extra money is still accessible even as they continue to earn interest.

Bonds
Bonds are money that investors lend to companies and institutions in exchange for regular interest payments and a full return of the principal investment upon maturity.

The most highly rated bonds are government-issued bonds. Risk-averse individuals may want to consider Exchange-traded Treasury Bonds (eTBs) and Exchange-traded Treasury Indexed Bonds (eTIBs) in their portfolios.

Insurance bonds
Some experts recommend insurance bonds to supplement super since it comes in the form of life insurance combined with fund-managed investments.

Also called bond investments, insurance bonds offer a taxation system that investors can benefit from if they don’t intend to make any withdrawals. Any income from the investment is only taxed within the investment and are not required to be reported in the individual’s tax return.

An investor is also allowed to top up their investment by up to 125 per cent of their previous year’s contribution and any withdrawals made after the 10th year of investment are tax-free.

Shares
Shares can give investors higher returns, but they are also more exposed to market risks.

When an investor owns shares, they actually own a portion of the businesses they invest in. They can vote on company matters as well as receive dividends from the company’s profits.

Shares are good short and long-term liquid investments because they can be traded (buy/sell) as long as the share market, such as the Australian Securities Exchange (ASX), is open.

Investment properties
Even if properties can be good investments, much of its value gained through appreciation or depreciation will depend on its location, the real estate market’s condition and the owner’s ability to manage it—thus may not be beneficial for all investors.

Investors should also consider the cost of maintenance, repairs and taxes and the fact that properties are most probably the most illiquid form of investment.

This information has been sourced from Nest Egg.