The rapid growth in the number of SMSFs has been one of the great success stories of Australia’s still-maturing compulsory retirement savings system.
This SMSF Retirement Insights paper documents Accurium’s pioneering study into SMSF retirement adequacy. It is the first such analysis based on actual SMSF capital and income data, compiled on an aggregate and anonymous basis, obtained in the course of the company’s actuarial certificate business.
The good news is that the typical SMSF couple, on the cusp of retirement at age 65, stand a very good chance of paying themselves adequate lifetime income to a ‘comfortable’ standard of $58,128 p.a. (the Association of Superannuation Funds of Australia (ASFA) Comfortable Retirement Standard for a couple). This is because their median balance of $1,093,000 exceeds the amount of capital required to provide that level of income from a ‘balanced’ portfolio of investments. In fact, the typical 62-year-old couple also find themselves in this fortunate position. However, it’s also clear that typical SMSF couples wanting to retire under the age of 62 might require income from other sources if they want to live at or above the ‘comfortable’ standard.
SMSF couples, to whom $58,128 p.a. is not sufficient to provide the lifestyle they desire in retirement, may need to make trade-offs if their notion of retirement adequacy is to be achieved. Only 43% of typical 65-year-old SMSF trustee couples have enough capital in their SMSF to spend $70,000 p.a. in retirement, while only 25% can afford to spend $100,000 p.a. for life with a high level of confidence. Of course, SMSF balances may only tell part of any retiree’s wealth story. In a compulsory super system that’s only 22 years young, it’s a safe bet that many SMSF trustees will have investment assets outside their SMSF.
If we assume that SMSF balances represent only 60% of their trustees’ retirement wealth, the picture gets rosier in terms of delivering against these higher desired income levels. The median wealth of all typical SMSF couples in our study was sufficient for them to spend $70,000 p.a. for life, with those aged 68 years or more standing a high chance of sustaining $100,000 p.a. for life.
Fall outside these parameters, though, and SMSF trustees might have to rethink the commonly held assumption that a higher capital balance alone will ensure a very comfortable retirement under all scenarios. Based on Accurium’s analysis, very few SMSF trustees can ‘have it all’ in retirement; that is, an early and very comfortable lifestyle over a longer-than-average lifespan.
Our modelling of real-world scenarios confirms that retirement age and starting balance are just the beginning of the journey, with higher capital balances providing only partial protection from the vagaries of retirement investing. Reliable ‘income outcomes’ depend heavily on the eventual investment horizon, investment returns (particularly from growth/risk assets), inflation experience and income needs.
While the overall story for SMSFs is a positive one, understanding and managing the various risks of retirement is key to achieving trustees’ financial goals and essential if disappointment and possible dependency are to be avoided later in life.