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Lower investment returns stretch SMSF investment goals | Accurium

A weaker investment outlook that indicates returns will be lower for longer means SMSF retirees need more savings to achieve their retirement goals. This was reflected by the Reserve Bank noting in July [1] that the neutral nominal cash rate, a key indicator, is now 3.5% rather than 5% previously.

Clients using some retirement projection tools to forecast their retirement might find that 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.

2016 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 2016 financial year. The study found the median balance for two member SMSFs increased by 1.2% over the year to $1.14 million, based on a median investment return of only 1.0%. This is lower than the average return over the previous 5 years of 5.8% p.a. for the SMSFs in the study.

Chart 1: Median SMSF balances and investment returns [2] as at 30 June

 lower investment returns stretch SMSF investment goals

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, after allowing for future Age Pension entitlements and tax, a 65-year-old SMSF couple will need $824,000 in retirement savings to be confident (with an 80% probability) of affording the ASFA Comfortable Retirement Standard, which is currently $60,063 p.a. for 65-year-old couples [3]. This is a 17% increase in savings required compared to last year’s report [4].

This increase in the cost of a comfortable retirement required could be attributed to

  • the increase in cost of living in retirement, as determined by the increase in the ASFA comfortable retirement standard from last year of $1,141 p.a., and

  • the weak investment outlook due to an increased probability of a ‘lower for longer’ situation where interest rates and equity returns remain low.

Around 66% of 65-year-old SMSF couples have enough in their SMSFs to afford the ASFA comfortable lifestyle. However, that comes with an important caveat. Lower than average returns in 2016 together with a weaker economic outlook mean that fewer SMSF couples are in this fortunate position compared to a year ago where 70% were on track for a comfortable retirement.

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.

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.

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 that their plans are sustainable.

To access Accurium’s research paper ‘SMSF Retirement Insights: SMSFs treading water’ which was prepared in conjunction with the SMSF Association, click here.


[1] Available at http://www.rba.gov.au/monetary-policy/rba-board-minutes/2017/2017-07-04.html.

[2] 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.

[3] 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% once retirees reach age 85 and to drop by 30% once one spouse passes away.

[4] Retirement Insights Volume 5, Are trustees prepared for retirement?, Accurium and SMSF Association, July 2016, https://www.accurium.com.au/-/media/Accurium/Technical-Hub/Retirement-Insights/Volume-5-Are-trustees-prepared-for-retirement-July-2016.ashx

Tags: Self-managed superannuaiton fund SMSF, Account-based pension

The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances.  While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.