Australians are living longer than ever. This is both a blessing and a problem. The experience of living longer and healthier lives is great news, but it’s a real challenge for many Australians to have the money to enjoy their longer life.
SMSF trustees are, on average, better placed than other Australians. Average balances are much higher, so the money in the SMSF will generally last longer. Wealthier people are also likely to be healthier and live longer. This is supported by research from Accurium that notes SMSF trustees are likely to live on average three years longer than the rest of the population. It’s a good thing that the average SMSF has more savings stashed away, but it might not be enough.
No one knows exactly how long they will live, which makes it difficult to build a financial plan for retirement to ensure that money lasts. Like many problems in investing, knowing the average outcome does not always provide you with the solution. Because few people are actually ‘average’. In fact, only one in 20 people live exactly to the ‘average age’. As such, it’s very hard to reach the target when you don’t know where the target actually is. The range of ages that people over 65 lived to in 2014 is shown in the graph.
This is the uncertainty of individual lifespans and it can have a big impact on planning for retirement.
A lucky few are wealthy enough that they can spend what they want and still not eat into their capital. For most retirees, particularly the quarter of the population who start as self-funded retirees, their solution is often to spend less. This can lead to a diminished lifestyle as many older retirees cut back in order to allay their fears about their money lasting.
It is here that an annuity can provide a benefit to SMSF retirees. An annuity will help manage the financial consequences of an uncertain length of life by continuing to pay the retiree for as long as they live. For many, this will bring the peace of mind of having in place a guaranteed stream of income to help cover the necessities in retirement. An annuity can also have the immediate impact that retirees can spend their money to sustain the lifestyle that they want after a lifetime of working and saving, knowing that essential income requirements can be met for life. The key to using the annuity is ensuring that there is the right balance between it and growth investments.
The role of the annuity is to make sure that income lasts as long as you. Remember, if you can’t spend enough of your retirement savings and you keep saving, the annuity might not be for you. Also, if you are running out of money, then you will, at some point, start to receive the Age Pension as you run out of assets and income. So the Age Pension will provide a safety net for everyone, but a retired couple with $1,000,000 in their SMSF is unlikely to be happy if they end up only able to spend the $34,252 a year from the Age Pension in their later years. The role of the annuity is to top up the safety net to an acceptable level.
Case study: Bob and Susan are both 64 and just retired, have $1,000,000 in their SMSF and spend $70,000 a year to maintain their current lifestyle. While this gives them a comfortable lifestyle now, this won’t necessarily last their lifetime as they draw down on their savings and given the uncertainty of how long they both will live. Bob and Susan really don’t want to rely on the Age Pension, but they admit they could survive on around $40,000 a year at older ages when they will be less active and not travelling as much. To secure this income level, they only need around $6,000 a year from a lifetime annuity to top up the Age Pension. In round numbers, they could secure this income for life, indexed to inflation, for around $150,000. They can then keep the majority of their investments in the SMSF invested for long-term returns. It is important to note that annuities today have different features, and different payment rates, so SMSF trustees should get financial advice (which is not provided in this short article) on the most suitable option for their individual circumstances.
The vast majority of new retirees can expect to live a long time in retirement. However, as retirees enter the middle of retirement, the length of future time in retirement becomes more uncertain. This increased uncertainty comes at a time when the average retiree will be less inclined, and possibly less able, to manage their own financial affairs. There are many more 65-year-olds happy to spend the time actively managing their SMSF portfolio than there are 80-year-olds doing the same. A lifetime annuity can really add value here by helping manage the increasing uncertainty around longevity. The pooling properties, just like insurance, mean that the risks are managed for the retiree. This plan won’t need constant adjustment, so the focus can be on enjoying the lifestyle that they want.
Important:Â This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
