Download One Minute Guide - Why betting on long-term `average

One Minute Guide
April 2013
Why betting on long-term ‘average returns’
is a gamble in retirement
When thinking about retirement, most people want to
know how much super they need to retire comfortably.
This depends on how well you want to live, what you spend
each year, and whether you are satisfied being fully reliant
on the Age Pension at any stage throughout your retirement.
What is a comfortable retirement?
Everyone has their own measure of a ‘comfortable’
standard of living; however the Association of
Superannuation Funds Australia Ltd (ASFA) has come
up with some useful indicators of the spending needs
of the average retiree.
ASFA estimates that the annual budget required to fund
a comfortable retirement, affording a broad range of
leisure and recreational activities, is $41,186 for a single
person and $56,339 for a couple (as at December 2012).
To achieve an annual income of $41,186 indexed
to inflation that lasts for 25 years, you would need
superannuation savings of $630,000 on top of the Age
Pension. This is assuming an inflation rate of 2.5% pa,
and that your super is invested in a moderately balanced
way, delivering an average return of 5.9% per year
(after fees)1.
But is this really enough?
Retirement income will need to last for 25 years or
more for many people
Market volatility can quickly erode your
capital base
Volatility in markets and the order in which investment
returns occur can make a big difference to your
account balance once you begin drawing on your
retirement savings.
Challenger One Minute Guide
If you enjoy strong investment returns in the first few
years of retirement, your savings will be more able to ride
market slumps should they happen later on. However,
if returns early in your retirement are negative, then
proportionately more of your capital is needed to fund
ongoing living expenses. This reduces the base for future
growth and your money will run out earlier, even if later
returns are good.
The largest impact from market risk is when the
investment portfolio is at its biggest
The problem with averages
Great care must also be taken when using average
returns to forecast how things are going to turn out in
retirement. An average return is simply the average of
a series of returns generated over a period of time. It is
not certain; the actual return you receive in any given
year and over the series might be higher or lower than
the average.
It is important to consider the effect that lower-thanexpected returns could have on your super balance
and the potential impact on your retirement lifestyle. It
could mean the difference between a ‘comfortable’ and
‘modest’ existence, or the difference between a ‘modest’
existence and total reliance on the Age Pension.
Taking into account some volatility2, you would need
$795,000 for your savings to last 25 years paying an
income of $41,186 per annum.
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One Minute Guide
An alternative to increase peace of mind
There is a way to ensure a higher probability of your
savings lasting for as long as you do. An annuity can
provide a secure stream of regular payments indexed
to inflation that is backed by capital held by an APRAregulated life insurance company. While investing an
entire portfolio in an annuity may not be for everyone,
annuities can play an important role as part of a
portfolio to help increase peace of mind and cover
market uncertainty.
The answer to how much you need for retirement still
depends on many factors. Those prepared to roll the
dice on market returns might be able to get by with only
$630,000 to live comfortably (as per the ASFA Retirement
Standard), but would need to be prepared to take the risk
of spending several years of retirement fully reliant on the
more modest Age Pension.
More information
Investors: Speak to your financial adviser or contact Challenger Investor Services on 13 35 66.
Financial advisers: For more retirement income research, visit AdviserOnline, contact your
Challenger Business Development Manager or call Adviser Services on 1800 621 009.
50% growth/ 50% defensive assets. A 5.9 per cent per annum return is consistent with the net returns of the moderately balanced strategy
(7.0 per cent) with a medium fee (1.1 per cent) in ASIC’s website: www.moneysmart.gov.au
2
Four in five towers Watson simulations underlying the Challenger Retirement Calculator meet these conditions.
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Disclaimer:
The information contained in this guide is provided by Challenger Life Company Limited, ABN 44 072 486 938, AFSL 234670 (Challenger) and is current
as at 3 April 2013. This information is not intended as personal financial product advice, legal advice, taxation advice or social security advice. It does
not take into account the investment objectives, financial situation or needs of any person. An investor should consider the appropriateness of this
information having regard to their own objectives, financial position and needs before making any investment decision. You should seek independent
financial advice and read the relevant product disclosure statement (PDS) prior to making an investment decision. All such PDSs are available by
contacting your financial adviser or Challenger by calling our Investor Services team on 13 35 66 or visiting our website www.challenger.com.au.
All examples are hypothetical and for illustration purposes only. They are based on our understanding of current law, which may change at a future date.
All information has been obtained from sources believed to be reliable and accurate at the time of publication. Any forward-looking statements in this
guide are by nature subject to uncertainty and contingencies, so that actual results may vary materially from any forward-looking statements provided.
All reasonable care has been taken to ensure correctness of facts stated and the examples given. We make no warranty in relation to, nor accept any
responsibility or any liability for any errors in misstatements nor for any loss or damage arising out of, or in relation to the material in this publication,
however caused. Past performance information is not a reliable indicator of future performance.
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