Dan Miles: 800,000 pre-retirees aged 60 to 64 face massive savings shortfall with less than $100,000 in super

A significant number of Australians heading into retirement may not have enough superannuation to live on and may need to invest more in higher-risk assets such as shares to ensure their investment goals are met so they can live comfortably in retirement.

An analysis of Australian Prudential Regulation Authority data reveals that about 60 per cent of MySuper accounts held by pre-retirees aged 60 to 64 at June 30, 2023 had low savings balances below $100,000, which is not nearly enough to fund a comfortable 20 or 30 years in retirement, even with the age pension.

Anyone who is nearing retirement should take note that if they have less than $100,000 saved, they may need to reassess the level of risk in their superannuation investments to be able to live comfortably in retirement.

The Association of Superannuation Funds of Australia’s more lavish “comfortable” retirement standard — or savings required for retirement at age 67 — is $690,000 for a couple and $595,000 for a single.

With some 800,000 MySuper accounts having a balance of less than $100,000 — which matches ASFA’s more basic standard of retirement and takes into account supplemented income from the age pension — many older Australians risk having to go without luxuries in what should be their most comfortable years.

A 65-year-old Australian woman today can expect to live another 23 years and a 65-year-old man another 20.3 years. Many pre-retirees need a much higher level of savings and stronger investment returns to help fund such a long time in retirement.

This analysis also suggests a significant cohort of older Australians may need to seek financial advice during the critical years before retirement. While the typical advice for a person this age is to lower portfolio risk as retirement approaches — which is something that lifecycle funds do automatically — lowering exposure to growth assets may not be good advice for many pre-retirees with low balances.

Ironically, those with lower balances may be better served by allocating more aggressively to growth assets such as shares and investing less in cash and bonds, given their need for better long-term results.

Indeed, those in pre-retirement and aged between 60 and 64 may still need strong returns to help fund decades in retirement, though they are more exposed to sequencing risk — or the risk that a market downturn can significantly dent their retirement savings.

Investors should seek personal advice on how they can best build their super to meet their needs and manage this risk. The advice doesn’t need to be all-encompassing financial advice. It can be limited to particular areas, such as retirement, and the better investment outcomes can potentially more than pay for the cost of advice.

However, these are complex calculations that require expert financial advice and an understanding of investment markets. Pre-retirees with savings above $500,000 are more likely to need to protect those assets from the risk of a market downturn.

It’s those on lower balances who are equally in need of advice and effective risk management plans to protect their nest egg.

Recently released wealth data from the Australian Bureau of Statistics reveals that household net wealth sat at a record $15.66 trillion in the December 2023 quarter, with wealth boosted by a record level of superannuation assets, which totalled $3.74t.

That super balance was boosted by rising asset values and contributions into pension funds following legislative changes to compulsory superannuation and strength in the labour market. So, as a nation we have a very high level of superannuation savings but on an individual level, the level of savings is very unevenly split and many still rely on the age pension.

It also pays to be across the ‘taper trap’ – the region where higher balances actually lead to less income because of the aggressive drop in the Age Pension. As super savings grow, the value of the government Pension is cut by an even greater amount thanks to a punitive quirk in Australia’s retirement system.

This is the impact of the taper rate introduced in 2017, which reduces the age pension by $3 a fortnight for every $1000 above the requisite asset threshold. In effect, the taper rate means that individuals are typically earning a negative real return on superannuation assets.

A financial adviser can help to manage this risk and to produce a higher level of superannuation savings overall, an essential goal for those with low balances.

Dan Miles is the managing director and co-chief investment officer at Innova Asset Management