Retirement saving: are you grower, spender or preserver?
New research that segments SMSF trustees into Growers, Spenders and Preservers considers a combination of retirement income risks and suggests more detailed cashflow strategies are needed.
Around 25 per cent of SMSF retiree couples are Growers, who will increase savings in retirement, 28 per cent are Preservers who will retain most of the value of their savings, and just over 20 per cent are Spenders who will consume most of their savings across their retirement, according to research compiled by SMSF specialist, Accurium. These findings are based on a typical SMSF retirement spending goal of $80,000 a year.
The remaining 26 per cent are at risk of running out of savings during retirement and might need to spend less so that their money lasts if they do.
The Grow, Preserve or Spend (GPS) Framework looks at where on the continuum--ranging from grow to spend--SMSF retirees sit, depending on how they intend to use their savings upon retirement.
"Many SMSF retirees adopt similar financial strategies when it comes to spending but this report highlights that retirees should think differently. The amount they can spend, and the appropriate retirement strategy depends on where they sit in the GPS Framework," says Accurium's general manager, Doug McBirnie.
"At one extreme are people with more than enough who will continue to grow their wealth during retirement. At the other are those who don't have enough to last and will run out of money. In between, are the options of trying to preserve the value of the initial wealth or taking a path that maximises consumption but leaves little or nothing for the next generation."
The direction of retirement consumption can be adjusted if required to ensure the goal of the retiree and current segment is aligned.
With different goals for the balances at the end of retirement each of these segments will require different retirement income strategies. Once the retiree's goal and segment are aligned, they can select a retirement income strategy which complements achieving that goal.
The GPS Framework assists a retiree in identifying their GPS segment and then presents a retirement income strategy which can assist in achieving the goal of that segment in retirement.
It suggests that while a simple bucket approach to generating retirement income might be appropriate for the limited risks faced by Growers; a more detailed cashflow strategy might be needed for Preservers who are more exposed to market timing risks, while Spenders need to focus more on managing the risk of outliving their savings and should consider the benefits of an income layering approach to ensure they have enough to continue to meet their needs.
SMSFs are different
A fundamental difference between SMSF retirees and those who have relied on APRA-regulated funds underpins the research. Because SMSF trustees overwhelmingly have higher balances than other retirees, estate planning considerations are more often a feature of their planning, as they want to pass on wealth to children or other beneficiaries.
McBirnie notes a key challenge the SMSF sector faces is a lack of data on SMSF retiree balances, with Australian Tax Office data fulfilling some requirements but not others.
"To get a better picture of capital consumption across SMSFs we need to use some non-public data sets. Accurium provides actuarial certificates to over 60,000 SMSFs annually which requires them to split their income between the pension (tax-free earnings) and accumulation phases," he says.
"Most of these funds have members near the start of retirement, and the database provides a good representation of the range of balances across all SMSFs at this critical juncture."
Accurium's research suggests that on average, an SMSF couple might have about 35 per cent of their total retirement savings outside the SMSF.
Chart 1: Estimated distribution of total savings at retirement for SMSF couples
Source: Accurium
The $1,137,000 median balance of a two-member SMSF, as at June 2016, is around four-times the level of an average APRA-regulated household approaching retirement. Extrapolating this, the same average SMSF might have total retirement savings of around $1,750,000.
"We can see that there is a 90 per cent chance income can be provided for the life of the retirees, but the real value of the $1,750,000 starting capital will not be preserved. In real terms, about one in four market outcomes would preserve the value of the original capital," the report notes.
Chart 2: Likelihood of falling in each GPS segment for a median SMSF retiree couple
Source: Accurium
The above chart suggests the median SMSF retiree couple maintain some capital for the next generation but will be consuming some capital over their retirement as well.
With a higher level of wealth, SMSF members are more likely to want to pass something onto the next generation but may also be looking to enjoy a comfortable lifestyle throughout retirement.
According to McBirnie, in practice, the key retirement risks will produce outcomes above the target 50 per cent of the time, and outcomes below target the other 50 per cent of the time.
"With the uncertainty around these key risks, it is best to think of the guidelines as a band when assessing goals and spending."
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Glenn Freeman is a senior editor at Morningstar.
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