A mid-tier accounting firm partner has warned retirees will have to revise their superannuation pension drawdown strategy if the forecast lower returns from equity and bond markets over the coming decade eventuate.
“If retirees have been drawing down at a higher rate [above the mandatory minimum] over the last few years, largely because returns have been pretty good so they feel a little bit wealthier, making them happy to draw down a bit more, and they still wish to preserve what they’ve got in super, they’re now going to struggle in this sort of environment,” HLB Mann Judd Sydney wealth management partner Jonathan Philpot said.
Philpot’s conclusion is based on calculations predicting the standard default option in superannuation funds, generally being a 70 per cent allocation to equities and a 30 per cent allocation to defensive instruments such as bonds, will generate an annual return of around 5.5 per cent to 6.5 per cent over the next 10 years.
“Compared to last year this looks pretty ordinary and even compared to the last few years it’s obviously lower than what it has been,” he said.
He pointed out retirees who are currently drawing down more than the required minimum amount have a few options to consider.
“The choice is either to cut back what they are drawing down now, which is always difficult when you get used to a certain level of income coming in, or now seek higher returns,” he said.
“And really the only way you can achieve a higher return now is to be decreasing that secure [or defensive] part of the portfolio.”
He suggested an adjustment of the portfolio weighting to include an 80 per cent allocation to equities or riskier assets and a 10 per cent allocation to defensive assets might be enough of a change to allow retirees to continue their higher-than-minimum superannuation pension drawdown strategy.
“A 10 per cent movement [in favour of riskier assets] would be adding about 0.5 per cent extra return to the portfolio, which doesn’t sound like a lot but over a long period of time, particularly in a lowish return environment, that 0.5 per cent is pretty important and certainly does add up,” he noted.