Retirees face income hit as returns dip, changes start
So far, financial year superannuation fund returns have been good with the prospect of double digit returns if world sharemarkets don't tank in June. The driving forces have been higher commodity prices and US markets reaching record highs.
The prospects for leading world economies including Europe and the US have improved, leading to confidence in a modest increase in projected world growth rates. The dampening effect of higher US interest rates hasn't to date been significant with world interest rates remaining at historically low levels.
Against this background, the government's $140 billion Future Fund has lowered its earnings targets to inflation plus a real return of between 4 and 5 per cent. Future inflation rates are likely to remain low if the recent trend of slow wages growth continues and the Australian dollar doesn't fall suddenly.
For super fund investors, future returns around the Future Fund target rate of 6 per cent or slightly higher would be an attractive result provided that it doesn't involve the possibility of future negative returns. Now that fixed interest returns are low and both property and equity markets are at relatively high levels, achieving higher returns would involve considerable risks.
Especially after the 2017 changes limiting tax-free pension accounts to $1.6 million, retirees will experience a sharp fall in their retirement income in any period of low and negative returns. The new rules don't allow any replenishing of pension accounts once the $1.6 million cap is triggered placing a high priority on achieving regular positive returns.
At older ages where the minimum annual pension requirement is higher, retirees will inevitably be forced to draw upon their fund capital to pay their pensions. At these ages, there's an increased need to achieve positive investment returns and avoid periods of negative income.
All these factors point to the need to have diversified conservative portfolios in situations where rebuilding investment assets is not an option. The severe tightening of the age pension assets test by using a 7.8 per cent taper rate has moreover reduced the scope for receiving a part age pension to cushion the impact of lower pension fund earnings rates.
With future investment returns likely to be lower than those in the recovery period after the global financial crisis, retirees facing a long period of retirement will need to boost their account balances before they retire. The short-sighted decision to limit future concessional contributions to $25,000 annually will make this task even more difficult for those with relatively small current account balances.
The combined impact of lower investment returns, the tougher assets test and reduced scope to boost super balances will make the task of funding a comfortable retirement more difficult than it ever has been.