Australians feel ill-prepared for retirement, one cohort is an exception.
Australian retirement savings in numbers.
Vanguard’s report in conjunction with InvestmentTrends surveyed Australian SMSFs and Chant West reported industry and retail superfund returns.
Median growth funds (61-80% growth assets) in super are on track to return a strong 8% for the financial year, backing up a strong return last financial year of 9.2%, according to a new study by Chant West. Although there was a pull-back in April, it was after five months of positive returns for members.
Senior Investment Manager Mano Mohankumar from Chant West believes it’s important to focus on super as a long-term proposition.
“Since the introduction of compulsory super in July 1992, the median growth fund has returned 7.9% p.a. The annual CPI increase over the same period is 2.7%, giving a real return of 5.2% p.a. – well above the typical 3.5% target. Even looking at the past 20 years, which includes three major share market downturns – the GFC in 2007-2009, COVID-19 in 2020, and the high inflation and rising interest rates in 2022 – super funds have returned 7.2% p.a., which is still comfortably ahead of the typical objective.”
Despite this performance, many Australians are not on track for comfortable retirements and feel behind with their superannuation. Vanguard/Investment Trends SMSF Report finds that Australians have a 27% retirement adequacy gap. A retirement adequacy gap measures the difference between projected income and preferred monthly income. SMSF members do trend better, with a 7% gap for the cohort.
There are a few levers that investors can pull to close this retirement adequacy gap. They include:
• Increasing contributions whilst working
• Retiring later
• Taking on more risk through their asset allocation
• Reducing the expected retirement income in retirement
For investors approaching retirement, my colleague Mark LaMonica outlined steps to take if you don’t have enough to retire.
The report reveals that 57% are choosing to take on more risk in their asset allocation to close the gap.
Depending on when an investor chooses to do this, it could have disastrous consequences. We only need to look to the GFC to see the impact on retirement savings when retirees are drawing down on depressed assets.
The bucket portfolio method is one way that retirees can reduce this longevity risk.
It is interesting that some people have identified taking on more risk as a way to close the gap. Many Australians are not taking enough risk in their superannuation. Taking more risk may be a move that improves the outcomes of many investors and maximises the time their portfolio lasts in retirement. We can look to Australia's largest superfund, AustralianSuper, for an example of investors not taking on enough risk en masse. 90% of their members are in the Balanced fund option. The balanced option includes close to a 36% allocation to defensive assets as of 31 December 2023.
I’ve written previously on why it’s important to get your asset allocation right at a young age. I’ve modelled the marked difference it can have on your outcomes.
Intuitively, investors that have SMSFs are more involved in planning and defining their retirement goals. After all, they have regulatory obligations to ensure they are informed about their choices and are making them in the best interests of their retirement. Further proof to this is the research revealing that the majority of new SMSF establishments are self-advised investors who have decided to set up an SMSF after internet research. This compares to older established SMSFs, where the initial suggestion for set up came primarily from accountants. This may be a large reason as to why they have a lower retirement adequacy gap – deeply understanding their own circumstances and their retirement strategy.
For those that are in industry and retail superfunds, it requires a little more proactive legwork. Approaching your retirement goals by assessing your own circumstances, what you hope to achieve and a sensible plan to get there may reduce this adequacy gap.
Central to this equation of what is adequate is understanding what is considered an ‘adequate’ retirement. Those surveyed returned that an adequate retirement would be 80% of their pre-retirement salary.
This number is meaningless to investors that are planning their own retirement. It is similar to applying someone else’s salary to your lifestyle and determining whether it is adequate. It may be, but is it realistic, achievable or even inflated?
Morningstar research finds that goals that aren’t definitive enough are detrimental towards properly planning and achieving a financial goal. Retirement is individual to each of us, and digging deeper into your goals and properly defining them increases your chance of success, as well as your perception of progress towards that success.
There are some of us that may be entirely unprepared for retirement. There are some of us that have planned for retirement and still feel ill-prepared for a comfortable retirement. The only way to truly know your retirement adequacy is by planning around your own circumstances and having a decent picture of the retirement that you want to have.
This starts with defining your retirement goals properly – do you need 80% of an arbitrary pre-retirement salary to have a comfortable retirement? It’s likely your answer will differ from the average.
By understanding your position sooner, you increase opportunity to pull levers other than increasing portfolio risk later in life. Simply planning may give you the peace of mind that you are adequately prepared for retirement.
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