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Your income in retirement

Australia’s superannuation industry is well into its third decade of development.

By 2040 it is expected that the super system will hold $9 trillion in assets. With an ageing population the issue of sustainable retirement income is critical to Australia's wellbeing.

The Financial System Inquiry has called for bipartisan support to enshrine the objectives of the superannuation system in legislation.

To provide income in retirement to substitute or supplement the Age Pension.

Finsia’s research has sought to debunk common misconceptions and bring innovative management techniques to the table. We hope through collaboration with industry we can help build a more reliable and effective superannuation system.

What is the role of asset allocation in preparing for retirement?

In their latest paper, Professor Mike Drew SF Fin and Dr Adam Walk F Fin explore the role of dynamic asset allocation strategies to ensure a smooth transition to, and through, retirement.

Taking a dynamic approach

A simple, yet effective strategy that considers portfolio targets, the financial risks associated with approaching retirement, and market tracking techniques can dramatically improve sustainability of superannuation savings. Such a strategy is capable of substantially outperforming atypical — and often static — investment strategies.

This latest report presents the industry with a strong benchmark for superannuation performance. It is an approach that considers one’s entire lifetime, the portfolio’s adequacy and market performance is both simple and dynamic enough to deal with the realities of retirement income.

Previous research in the series ...

Part one — Sequencing risk

Investors are highly vulnerable to fluctuations in financial markets as they near retirement and this problem is known as sequencing risk. 

Sequencing risk is something we all need to avoid. It’s the possibility of receiving the worst possible investment returns in their worst order. When your super nest is large a negative shock is more acute than if you had a small balance. So navigating through your final years before retirement is critical to securing a reasonable standard of living in retirement.

The implications of sequencing risk can be debilitating. The 2000s presented huge risk for retirees as the dot-com bust and global financial crisis ravaged asset values. In the graph, by simply reversing returns on a default strategy from 1972–2011 we find that one could be $1.4 million better off at retirement.

Armed with this knowledge investors can prepare. Shifting the asset allocation in superannuation funds from high-growth equities to less volatile assets, such as bonds, over time will make your super nest egg more robust and sustainable. This simple rule could vastly improve the sustainability of many Australians retirement incomes.

Part two — How safe is a 4% withdrawal rate?

In the post-retirement phase, conventional wisdom holds that you can withdraw 4% of your savings per annum and expect them to last the course. 

Finsia research debunks this myth. In a survey of the annualised performance of different investments in a number of countries over a century the 4% Rule is challenged.

In fact, even with the exceptional performance of the Australian stock market over the past century, a 4 per cent withdrawal rate over 30 years on a 50:50 growth/defensive asset allocation is associated with a 20 per cent chance of financial ruin.

Industry actions that revolve around dynamism such as scenario testing, investment governance and asset allocation can all work in harmony to help foster a more sustainable retirement income system.

Further reading and resources

Consult the JASSA archive for research about Australia’s superannuation system and the longevity risk challenge.