Will your SMSF deliver a comfortable retirement?

Checking whether your self-managed super fund is on track to deliver a comfortable income in retirement is an essential part of running an SMSF and there's no better time to tackle the job than at the start of the new year.

New research shows most SMSF members stand a very good chance of enjoying a comfortable retirement. But the bad news is that if you're hoping to retire at 60 and live it up on $100,000 a year, you may need to take a reality check. SMSFs have larger-than-average balances and members tend to be better informed, well advised and educated; and quite often healthier. They also aspire to higher standards of living in retirement.

Using its database of 60,000 SMSFs, actuarial services provider Accurium has done a pioneering study into retirement adequacy to see how funds are tracking and to provide a guide to help SMSF members meet their income goals. Its actuaries modelled thousands of scenarios to allow for greater variability of investment returns, inflation and lifespans.

The research found the typical SMSF couple retiring at 65 stand a good chance of paying themselves $58,128 a year (the Association of Superannuation Funds of Australia's household budget for a comfortable lifestyle).

"Their median super balance of $1,093,000 exceeds the amount of capital required to provide that level of income from a balanced portfolio of investments," says Accurium." 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."

Few retirees' savings will allow them to "have it all"

Those wanting a more affluent lifestyle might be disappointed. "Only 43% of typical 65-year-old SMSF trustee couples have enough capital in their SMSF to spend $70,000pa in retirement, while only 25% can afford to spend $100,000pa for life with a high level of confidence."

A couple at 65 would need $1,285,000 if they wanted an 80% level of certainty of maintaining a spending level of $70,000 a year throughout their retirement and a couple wanting $100,000 a year would need $2,094,000.

Trustees who have insufficient assets for their desired level of income have a number of options. They can work longer and contribute more to their SMSF, lower their spending and lifestyle expectations, change their investment mix or accept they are unlikely to achieve their goals.

Based on Accurium's analysis, 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 or risk assets), inflation experience and income needs."

Stress-tested forecast

Accurium's SMSF retirement adequacy model incorporates variables in investment returns, inflation rates, age pension payments and lifespans. It provides a guide, to a high degree of modelling confidence, on how much capital retirees need to fund sustainable retirement incomes. Thousands of what-if scenarios were stress-tested to obtain high-confidence projections. Such probabilistic modelling better accounts for future uncertainty.

The study uses ASFA's annual incomes for "modest" and "comfortable" retirements: $33,644 and $58,128 respectively. (Since then they have been marginally increased.) The investment mix is the SMSF average, broadly 50:50 in growth and defensive assets. The couple are assumed to be the same age and on the death of one all assets and super are transferred to the survivor, who spends at the same level. The calculations also assume that all the couple's capital is fully used up over their lifetimes.

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