In our first paper: “Balancing the Needs, Challenges and Dilemmas of Retirement Investing”, we noted that Income generation isn’t as easy as it once was. The fact retirees require income needs no explanation.
How should we think about generating income in retirement? In August 1991 the Budget address, by then Treasurer John Kerin, proposed the introduction of compulsory superannuation in
1992. At the time a 90 Day Bank Term Deposit was paying 9.75% p.a.
Bank Term Deposits are one of the reasons Australia is the ‘lucky country’ as today these are guaranteed, or true ‘risk free’ investments. Unfortunately, while the ‘risk free’ aspect
remains attractive, the investment returns compared to 30 years ago are not.
While cash remains ‘risk free’ relying on it as your only source of income risks quality of life in retirement. Therefore, to generate sufficient income to sustain a comfortable retirement, we are forced to accept some level of investment risk. In simple terms, the more risk we accept, the higher income we should expect to generate. While acknowledging this,
acceptance of risk increases the probability that the asset base we’ve spent 40+ years working to build is at some risk of diminishing.
How Much is Enough?
The Australian Financial Security Authority “AFSA” advises that a comfortable retirement for a retiree with the ATO Median superannuation balance 5 eligible for the Government Pension needs to generate 7.6% per annum. Once upon a time, generating this level of income was achievable using “risk free” approaches. This is an exceedingly lofty ambition today with cash rates closer to 1%. As we’ve noted investing for the specific needs of retirement is incredibly complex, while much of the commentary proposes solutions that only work for those with adequate assets to be self-sufficient in retirement.
There are various proposals surrounding the use of draw-downs to supplement income generation, such as the concept of a constant draw-down policy in retirement, which we’re supportive of. However, we are concerned that their applicability is limited to only those with Asset Bases sufficiently adequate to provide for a self-funded retirement, therefore risking overlooking the
issues facing a majority of retirees.
The following commentary attempts to investigate the issues facing those with Asset Bases around the level of the ATO Median 2016-17, where the issue is more stark. For these retirees drawing down their asset base guarantees a retirement well below comfortable.
For Retirees with asset bases at or below the level of the ATO Median their Asset Base is sacrosanct.