Portfolio diversification and a greater allocation to growth assets are likely to help retirees make their superannuation last longer, at a time when Australians are living longer than ever before, according to new research from the Association of Superannuation Funds of Australia (ASFA) and State Street Global Advisors (SSgA).
Released ahead of ASFA's Investment Interchange, the report found that retirees with a defensive portfolio (75 per cent cash/fixed income and 25 per cent Australian equities) should reasonably expect to be able to draw down on their superannuation until the age of 90, taking into account receipt of a part Age Pension.
However, those who invest in a more diversified portfolio (43 per cent cash/fixed income, 26 per cent Australian equities, 17 per cent international equities, 10 per cent alternatives and 5 per cent property), would be able to fund their retirement, on average, for an additional 8 years, before their savings run out.
With the Intergenerational Report sparking a lively debate about how retirees will manage an increasing degree of longevity risk, the ASFA and SSgA report highlights the importance of ensuring the regulatory framework for retirement income-stream products is adjusted to allow product innovation to flourish.
ASFA CEO Pauline Vamos said, “With many Australians expected to live longer in retirement than ever before, managing the risk that they will outlive their savings will become increasingly difficult. We have said for some time now that the industry needs to develop products that deliver a regular and stable income stream, provide longevity risk management and are flexible enough to deal with unexpected events. However, at present, the regulatory framework that governs these products has been overly prescriptive, which has slowed innovation and hindered product development.
“The Financial System Inquiry (FSI) made it clear that the way we approach retirement phase investing is due for a significant overhaul. It's now up to the Government to implement policy settings that will enable the industry to make that happen,” Ms Vamos added.
In addition to the above findings, the report also found that the average couple in Australia will need around AU$500,000 to live comfortably in retirement assuming receipt of a part Age Pension and the couple remaining relatively healthy and owning their own home.
“We all know that, as we age, unexpected health, medical and other costs can arise, and we may end up living longer than we plan. With escalating pressures on the Federal Budget, it's probably not the best idea to rely on the government to fund your retirement, as well as your other age-related expenditure. Save as much as you can now, and protect yourself against possible policy changes down the track,” said Ms Vamos.
Mark Wills, the Asia Pacific head of SSgA's Investment Solutions Group, said many retirees are not comfortable with holding larger proportions of growth assets and are inclined to take what they viewed as the safer option of increasing the cash and fixed income in their portfolios.
“Based on our simulated returns, this approach is likely to shorten the period they can draw down on their lump sum,” he said. “Life expectancy is increasing and people will need portfolios with a good probability of lasting at least until the age of 90. Growth assets, which will generate sufficient returns to support lifestyle aspirations, outpace inflation and minimise longevity risk are critical, along with some downside risk protection.”
The report's analysis identified three investment outcomes relevant to thinking about retirement income: average, pessimistic and optimistic.
While the average outcome for a defensive portfolio would be a lump sum that lasts until the age of 90, under the worst case scenario, there is a 75 per cent chance the lump sum would be fully consumed by the age of 84. This is significantly less than the average life expectancy forecast by the Intergenerational Report in 2054-55 of 95.1 years for men and 96.6 years for women.
By contrast, under the most optimistic outcome in a defensive portfolio, retirees would have a one in four chance of making their lump sum last until the age of 105.
Ms Vamos says this highlights why it is so important for people to use tools, calculators and advice services as they are nearing or entering retirement.
“Many people transition to retirement faced with complicated decisions to make, and with a deficit of information. This leaves them vulnerable to being invested in products that may not deliver the best retirement outcomes. Getting the right information at this critical period can help them make good investment decisions which can make a massive difference to their savings and lifestyle in retirement,” Ms Vamos concluded.
To download a copy of the report, please click here.
For further information, please contact:
Lisa Chikarovski: Manager – Consumer Strategy, Media and Public Affairs, 0451 949 300.
ASFA is the peak policy, research and advocacy body for Australia's superannuation industry. It is a not-for-profit, sector-neutral, and non-party political national organisation, which aims to advance effective retirement outcomes for members of funds through research, advocacy and the development of policy and industry best practice.