With the upcoming Federal Budget, there is once again speculation around possible changes to superannuation regulations, including changes to contribution caps or the introduction of lifetime contribution limits. While we have no particular insights into what may actually change, if anything, we do know that both the size of their asset base and the return earned on it are important determinants as to whether retirees will be able to enjoy the lifestyle they seek.
Since retired couples obviously have greatly differing lifestyle needs and hence income requirements, there is no simple answer when it comes to determining how much is enough or what the required return is.
Is $1 million in super enough to retire comfortably?
A recent Retirement Income white paper by Legg Mason and its affiliate Martin Currie Australia (MCA) did, however, consider these questions while looking at whether retirees really need $1 million in superannuation to retire with an annual income of $58,784. This is the level of income that the Association of Superannuation Funds of Australia (ASFA) estimated was needed at 30 June 2015, for a comfortable retirement lifestyle for a couple aged 65 (provided they own their own home and are relatively healthy). Part of the amount needed will be (as legislation stands currently) funded by the Age Pension, but any shortfall needs to be generated by the retiree’s pool of assets.
Required yield and asset sizes for comfortable retirement incomes
Low yields present a tough challenge
While the results may seem unsurprising at first glance, achieving the income required for a ‘comfortable lifestyle’ (in a world where yields on traditional defensive asset classes like bonds and cash are at historic low levels) will be exceptionally challenging. And, with many people now expected to live well into their 80s, any income needed to support their current lifestyle will need to grow by the rate of inflation at a minimum, to ensure there is no loss of effective purchasing power.
Yields on global government bonds and official cash rates (%)
These low yields are of particular relevance to self-managed super fund (SMSF) trustees, given that the latest ATO statistics on the sector found that the average allocation to cash and term deposits still represented 27.4% of total assets. While such a large allocation helps to provide a level of capital stability and can be used as a source of liquidity in times of market stress, it also makes generating the income needed to live on, much more difficult.
What is the solution?
The solution is certainly not to only allocate to growth assets like equities, because this introduces its own set of risks. The best portfolio mix will depend on personal circumstances, so ideally advice should be sought from a qualified adviser.
What is clear, however, is that unless retirees have a very large asset base, traditional defensive assets will not provide the required income for a comfortable lifestyle. Retirees need to carefully consider the concept of risk and what it means to them personally.
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