Should Australians in retirement, or nearing retirement, be reappraising their income?
As Australia awaits a government response on the Retirement Income Review handed to the treasurer last Friday and as estimates of super withdrawals under the COVID early release scheme are revised from $29.7 billion to $41.9 billion – the long-term outlook for super earnings is sobering.
Superannuation balances are looking much healthier than they were in March, but over the longer term, expectations have been lowered. Australians in retirement, or close to retirement, are – or should be – reappraising their income.
Super funds have averaged almost 8 per cent per annum over the past 30 years, which is nearly 5 per cent per annum above the long-term inflation rate. That performance has seen the average super fund account balance more than double in the past decade, says Selecting Super.
Kirsten Temple, manager of research at investment consulting firm JANA, offered the following insights on the long-term outlook to Nine media.
“The Reserve Bank of Australia’s decision to cut interest rates to a record low supports the economy and is great for mortgage holders but not for those relying on investment returns,” she says.
“You need only look at the interest rates paid on bank term deposits or the yield of bond funds to know that retirees will struggle to get much income from the more stable cash and bond components of their retirement pot.”
Ms Temple explains that low interest rates drive the price of growth assets, including shares, higher as investors who cannot achieve desired returns they need from cash and bonds shift up the risk curve.
“That creates share price competition,” she says. “When the price of an investment increases, the amount you need to invest to gain a suitable income stream or a share of future growth is higher. It works the same way with your super fund, too.”
She says the super system relies on an assumption that the value of contributions grows over time and that our investments will do some of the heavy lifting in building a nest egg.
But she says that with rates as low as they are, investment returns achieved over the nearly 30 years of the Super Guarantee are unlikely to continue.
“Super funds and their members now face a conundrum: continue to target the same historic returns knowing that it comes with higher risk – and a greater chance of funds failing to hit their objectives – or accept that the cost of retirement will need to be funded by additional current income from members.”
This is not just a problem for individuals, it is a problem for Australia, she says, due to the financial burden presented by the country’s ageing population on the Age Pension.
So, what should superannuation members do? Graham Hand, managing editor of investment site FirstLinks, says the first step is to be realistic.
For all the expert opinions, personal judgement is the final arbiter, he says.
“For extra security in retirement, instead of expecting 5 per cent above inflation … aim for closer to 2 per cent to 2.5 per cent.
“Planning should not be based on a short-term buying opportunity in the pandemic, but taking a longer-term view across many investment cycles.
“Shares are down only about 15 per cent and back to early 2019 levels. Markets are trading above their long-term price-to-earnings ratios, and are likely to produce relatively poor returns for at least a decade.”
He says that while the outlook affects all generations, baby boomers, who have already built their retirement savings, will need to watch their drawdown levels, as spending 5 per cent of a pension fund might erode capital quicker than expected.
Mr Hand says the potential for future tensions between retirees and the government is obvious. “Many people in older generations have benefitted from negative gearing, tax-free capital gains on their family homes, favourable property prices, strong stock and bond markets and lightly taxed savings in the form of superannuation,” he says. “The calls for increasing pensions, health and aged care spending also predominantly benefit retirees. The social contract between generations will be challenged.
“The reality is that return for risk payoffs are now lower … But de-risking involves a greater acceptance of a lower average return.
“The best way to minimise the impact is to ensure as much financial self-sufficiency as possible, which begins by not deluding ourselves about future returns.”
What measures have you taken to reassess your spending or expected spending in retirement?
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