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Low-return environment highlights value in retirement risk advice

Melanie Dunn  |  15 Sep 2016Text size  Decrease  Increase  |  

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In order to address the most important part of any retirement plan, trustees need projection tools that allow for risk and don't just use average returns and lifespans.


Much has been made of late about how the current low-return environment could have long-lasting consequences, with retirees warned to prepare for future returns lower than historic averages.

People using some retirement projection tools to plan for their retirement might find the return assumptions used are unlikely to be delivered.

In light of volatile and uncertain investment markets, retirees require forecasts that allow for risk as part of their retirement planning.

Instead of relying on fixed return assumptions that won't pan out in the future, retirement projection tools can add value by illustrating to retirees the range of outcomes their investments might achieve over retirement.

Indeed, this is critical for retirees in order to make decisions such as whether they can afford to retire, or what level of spending is sustainable during retirement.

I'll be discussing these risks, and how to help mitigate them, in greater detail at the Morningstar Individual Investor Conference on Friday, 14 October.

2015 SMSF returns and fund balances

Research conducted by Accurium and the SMSF Association of over 65,000 SMSFs looked at how the retirement adequacy of Australia's SMSF trustees has changed over the 2015 financial year.

The study found the median balance for two-member SMSFs increased by 3.0 per cent over the year to $1.1 million, based on a median investment return of 4.2 per cent.

This is lower than the average return over the previous five years of 6.2 per cent per annum for the SMSFs in the study.


Chart 1: Median SMSF balances and investment returns1 as at 30 June


1 Imputed investment returns are calculated net of administration expenses and gross of income tax. These imputed investment returns should not be used in comparisons, particularly with other superannuation sectors.


The effect of current low returns on retirement adequacy

To consider retirement adequacy, the research used Accurium's retirement healthcheck, a retirement projection model that considers 2,000 economic and demographic scenarios and provides estimates of the savings needed to afford different lifestyles in retirement with different levels of confidence.

The research found that a 65-year-old couple will need $702,000 in retirement savings to be reasonably confident of affording the ASFA Comfortable Retirement Standard, which is currently $58,922 per annum for 65-year-old couples.

This is at the 80 per cent confidence level, meaning retirees still have a one-in-five chance of outliving their savings and assumes an asset mix consistent with the ATO average for SMSFs in pension phase.

Age pension entitlements, tax and superannuation settings are also allowed for.

The results are testament to the success of the SMSF sector as they show that around 70 per cent of SMSF couples have enough in their SMSFs to afford this lifestyle.

However, that comes with an important caveat. Lower-than-average returns in 2015 together with a weaker economic outlook mean fewer SMSF couples are in this fortunate position compared to a year ago where 75 per cent were on track for a comfortable retirement.

The effect of lower expected returns is also felt by those with aspirations of a higher standard of living in retirement.

For example, the study found that a 65-year-old SMSF couple will need $1,886,000 in savings to be reasonably confident of affording $100,000 per annum in retirement.

The proportion of 65-year-old SMSF couples with sufficient assets in their SMSFs to support this lifestyle has fallen from 34 per cent to 29 per cent over the year.


Chart 2: Savings required for different spending levels2 with 80 per cent confidence vs. median SMSF balance


2 Spending levels are assumed to keep pace with inflation, and allow for changing circumstances as retirees age. Specifically, spending is assumed to reduce by 10 per cent once retirees reach age 85 and to drop by 30 per cent once one spouse passes away.


Savings outside of superannuation will assist SMSF retirees achieve higher standards of living than savings in the SMSF alone can afford.

However, this study highlights the need for trustees either in or preparing for retirement to review their plans to ensure they remain sustainable.

The current lower-return environment means retirees need more in savings to achieve their retirement goals.

SMSF trustees' retirement plans

The research also analysed the sustainability of individual SMSF households' retirement plans based on their desired spending levels and their savings, both inside and outside their SMSF.

Of the 1,500 households in the study, three in five could be reasonably confident their savings will last as long as they do.

In fact, over a third could be very confident their plans are sustainable, meaning they had a less than one in twenty chance of outliving their savings.

Our study also found a clear correlation between wealth and sustainability. It might seem intuitive that those with more wealth are more likely to be able to sustain their desired level of spending in retirement.

However, it also shows that SMSF retirees do not automatically increase their spending in line with higher levels of wealth.

The higher sustainability levels found for wealthier SMSF retirees suggests some might be able to enjoy a higher standard of living than they are currently planning, without introducing significant longevity risk.

Value of retirement risk advice

Decisions around how much to spend each in year in retirement, how essential expenditure will be met and how to adjust asset allocations in response to potentially lower-yielding markets are the most important part of any retirement plan.

In order to do this effectively, retirement projection tools that allow for risk and don't just use average returns and lifespans are needed.

Tools like Accurium's retirement healthcheck consider a range of outcomes and work out the likelihood of achieving retirement goals--providing retirees with confidence their plans are sustainable.

Don't miss out on your opportunity to register for Morningstar Individual Investor Conference 2016--seats are filling fast.


Melanie Dunn is an associate actuary and SMSF technical services manager with Accurium. This article was first published on This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

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