Each year in Australia an estimated $70 billion of superannuation money flows from accumulation into pension phase. This largely represents the baby boomers generation winding up their working careers and entering retirement. With self-managed superannuation funds (SMSFs) the fastest growing sector of the Australian superannuation industry, it is not surprising that SMSF trustees are concerned about their retirement plans. ATO statistics show there are now over 1 million SMSF members. Around half of these are already of retirement age and half again are expected to become eligible to receive a pension in the next ten years.
The Investment Trends (2014) survey indicates that in the face of market volatility and uncertain life expectancy there is an unmet need to ensure that money lasts for life. In fact, SMSF trustees are willing to pay an average of $2,500 per annum to ensure this need is met. The survey shows that SMSFs want help with their retirement strategies and that their accountant is a person that they trust to assist them with this task.
The removal of the accountants’ exemption from 1 July 2016 sees many accountants faced with a difficult decision on how to continue servicing their SMSF clients. We see a huge opportunity for accountants to provide services that address client concerns about retirement, with or without an Australian financial services licence.
The November 2014 Financial System Inquiry (FSI) report stated that ‘superannuation funds should provide retirement income projections on member statements’. It is believed that this will enable retirees to make informed decisions about their retirement savings while alerting them to risks such as sequencing risk and longevity risk. However where does this leave SMSFs who are leading the asset pool but don’t receive retirement income projections?
At Accurium we are working hard to provide you with tools to take advantage of the rapid changes, while also providing you with opportunities to enhance client relationships and opening valuable new revenue streams for your organisation.
With the right understanding and tools to communicate the impact of key retirement risks you can help guide your clients through the many risks that they face as they enter retirement.
This case study uses Accurium’s retirement healthcheck to assess a client’s financial position in retirement.
The retirement healthcheck tool is available to Accurium clients and quickly assesses a household’s ability to sustain any given lifestyle throughout retirement. It can assist with providing your clients with a third party evaluation of their retirement position and whether it is sustainable.
John and Mary are existing clients who want to know if they have enough saved for retirement.
John and Mary are 60 and 58 years old respectively and have approximately $1.3 million in savings. Based on their current lifestyle, they believe they will need an annual budget of $90,000 throughout retirement in today’s dollars. Accurium’s retirement healthcheck can be used to assess how sustainable this level of spending is given their resources.
The retirement healthcheck provides John and Mary with a retirement sustainability result of 13%. This result shows the likelihood that the spending level will be sustainable over the 2,000 ‘real world’ scenarios tested, allowing for inflation, sequencing risk and different lifespans.
The result serves as quite a reality check for John and Mary. They want to be at least 80% confident that their retirement plans are sustainable so that they won’t have to fall back on only the Age Pension.
By using the retirement healthcheck to test the impact of changes in spending on the sustainability result, you can provide John and Mary with a better understanding of the lifestyle that they can afford with their current savings. It shows that if they retired today they may have to reduce their spending aspirations to $61,000 p.a. in order to be 80% confident of their savings lasting for life.
John and Mary don’t believe that the reduced spending budget would be enough to support their desired lifestyle in retirement and consider the possibility of working a few more years and saving more for their retirement.
You can run a new scenario to determine the level of savings that John and Mary will require in 5 years’ time to achieve their goal of increasing their retirement sustainability result to at least 80% while maintaining their desired lifestyle of $90,000p.a. By running a new scenario and assuming John and Mary are 5 years older, it shows that based on the results, they would need an additional $700,000 of savings (in today’s dollars) in order to achieve their goals.
With a clear retirement savings target now in place, you can help John and Mary devise a plan to achieve their goal.
The full case study for this couple can be found here.
More information about the removal of the accountants’ exemption and your options can be found in the following Chartered Accountants Association of Australia and New Zealand factsheet: Limited licensing for accountants. Not long to go!
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.