Retirees with less than $250,000 in their superannuation nest egg on retirement face a high likelihood of running out of money within a decade if they target a comfortable lifestyle, a new study from the Monash Centre for Financial Studies says.
But the good news is that at balances greater than $400,000, "the chance of sustaining income rises to near certainty, regardless of portfolio design", Associate Professor Ummul Ruthbah said.
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Larger nest egg the key
According to the research carried out by Associate Professor Ruthbah and Dr Trinh Le, retirees with smaller savings pools can't sustain higher spending targets – a comfortable lifestyle – regardless of their portfolio design.
Associate Professor Ruthbah said:
If someone has a low superannuation balance, one option is to adjust spending. Our study finds that when retirees target a moderate level of spending rather than a more comfortable lifestyle, the portfolio is more likely to remain sustainable over ten years, regardless of the asset allocation. Another important consideration is maintaining some exposure to equities. Our capital market assumptions suggest that bond-only portfolios are unlikely to generate optimal returns relative to the level of risk taken over the long term.
The research also highlights the importance of market losses early in retirement.
The research report said:
For example, someone who retired in 2022 – a year impacted by market volatility that delivered negative equity and fixed income returns – may end up with a significantly lower portfolio balance after 10 years than someone who retired in 2023 with the same superannuation balance and investment strategy. One approach retirees can consider is to reduce or postpone withdrawals from their superannuation during periods of significant market decline. More generally, retirees may benefit from adopting a flexible withdrawal strategy that adjusts to market conditions and personal circumstances, rather than relying on a fixed withdrawal rate regardless of investment performance.
The report said an early market downturn can reduce ending balances by as much as 25%.
And in terms of portfolio design:
The evidence points to a simple conclusion: retirees benefit from maintaining meaningful exposure to growth assets. Portfolios that lean too heavily on fixed income may feel safe in the short term, but almost guarantee declining balances over time.
Gender gap needs to be addressed
It also found that women were at greater risk of depleting their superannuation savings, given they tended to have 20% to 30% less to begin with.
Associate Professor Ruthbah said:
This gap has profound implications for retirement adequacy and policy design. It underlines the need for measures to boost women's superannuation savings, whether through targeted contribution incentives, reforms to address career breaks and pay disparities, or enhancements to the Age Pension safety net.
The report used the Association of Superannuation Funds of Australia (ASFA) standards, about $51,800 a year for a comfortable lifestyle and $32,900 for a modest one.
