Why SMSF members should plan on living to 100

The trick is to avoid ending up in your twilight years with too much money that you wished you’d enjoyed earlier, writes Anthony Fensom.

Plan on cracking a century for your personal letter from the Queen? The good news for self-managed super fund members is that they are living longer than ever before, with the benefits of greater wealth and education to enjoy the twilight years.

The average Australian commencing work today can expect to live to the age of 92, according to the latest government data.

However, SMSF members can expect to live around three years longer than the average, according to research conducted in 2015 by Accurium on about 65,000 SMSFs.

It found life expectancies for SMSF trustees averaged 90 years for men and 91.7 years for women, exceeding the Australian average by 2.7 and 2.3 years, respectively. This is due to such factors as health, nutrition and lifestyle, quality of housing, geographical location and occupation.

SMSF trustees are also wealthier and better educated, with taxable income 83 per cent higher than non-SMSF members and with 81 per cent holding a tertiary qualification, the actuarial and financial services group said.

With continued improvements in healthcare and technology, overall life expectancy could continue to rise and is expected to reach nearly 100 years this century.

Nevertheless, the federal government’s recently released “Retirement Income Review” found that “most retirees leave the bulk of the wealth they had at retirement as a bequest.”

“Retirees are generally reluctant to draw down their savings in retirement due to complexity, little guidance, reluctance to consume funds that are called ‘nest eggs,’ concerns about possible future health and aged care costs, and concerns about outliving savings,” the report said.

“Using superannuation assets more efficiently and accessing equity in the home can significantly boost retirement incomes without the need for additional contributions,” it suggested.

The report said few Australians purchase “longevity” products in retirement, arguing this situation could be improved by the government’s proposed “Retirement Income Covenant,” which had been scheduled to commence on 1 July but was deferred. (Longevity risk is the risk of outliving your savings).

How should SMSFs respond?

Don’t miss experiences

“My feelings are that you should strive to live to 100 and to finance a good long-term lifestyle, but not at the expense of foregoing travel, hobbies and experiences in your 60s through to your 80s,” said SMSF specialist adviser Liam Shorte.

“I have no clients in their 80s-plus who regret spending funds on travel and hobbies in early retirement, but I have many with more than adequate savings that were too frugal in their 60s and 70s and missed out on travel or spending time with grandchildren in other states or countries.”

Shorte’s comments are backed by the government’s retirement report, which found that during the global financial crisis SMSF members “were more likely to switch to more conservative investment strategies and therefore crystallise losses, than members in default funds.”

Shorte points to the importance of home ownership, a factor also supported by the government report.

“Why should you plan but not panic about longevity? If you own your own home then you have the comfort of a guaranteed roof over your head and as your assets drop in value through your 70s to 90s you may become entitled to some age pension,” he said.

“If not, you may be able to access equity in your house via downsizing or staying put and using the Pension Loans Scheme [PLS] [a voluntary non-taxable government loan] or an equity release product, so you will never be destitute, which some people fear.

“In fact, in low interest periods like we are currently in, partial age pensioners are often better off than their fully self-funded retirees battling with sub-1 per cent term deposit rates and hit-or-miss dividends.”

In addition to the PLS, which is effectively a reverse mortgage for age pensioners and self-funded retirees, the government’s “Downsizer” scheme allows people aged over 65 to contribute up to $300,000 to super if they sell their home.

Asset allocation

Jonathan Lee, executive director at Solomons Wealth Management, notes the importance of strategic asset allocation in ensuring the longevity of a portfolio. This is achieved by weighting asset classes by the investor’s risk profile—the level of risk they are willing to take for a level of return over a given period—and ensuring diversification across growth assets such as equities and defensive assets such as cash.

“In recent years we have seen a significant increase in SMSFs holding single asset classes with limited recourse borrowings. This ultimately led the Australian Taxation Office sending out warning letters to 17,000 SMSF trustees last year,” he said.

This reflects regulations requiring trustees to show evidence in their investment strategy of diversification, how investments satisfy retirement objectives and expected cash flow requirements and the liquidity of such investments, among other areas.

“As an adviser, I constantly hear comments from clients that ‘in the long run, property prices will never fall in Australia. Why do I need to invest in anything else?’ Yet I would never recommend risking my whole retirement nest egg in one asset class,” Lee said.

“No asset class is immune to prolonged periods of no real growth,” he warned. This is evidenced by Japan, which experienced an asset bubble where property prices rose by nearly 10 times in 20 years, yet was followed by a bust in around 1990, with prices yet to fully recover.

While Australia has only just suffered its first recession in three decades due to the COVID-19 pandemic, Shorte cautions SMSF trustees against being overly cautious.

“Having full control of your money can sometimes lead to hoarding and missing out for fear of using capital,” he said.

“So while I agree people should plan for 100, I feel SMSF trustees may already be on the more conservative side and need to understand the opportunities or interplay of an age pension or equity release later in life to help fund the twilight years,” he said.