The key risks for SMSF trustees

Longevity and elder abuse remain two big issues.

Summary: Life expectancy levels are continuing to rise, but that creates its own issues – in short, having enough funds to last. SMSF Association new CEO John Maroney cites this as a key problem for retirees.

Key take-out: As well as undertaking proper estate planning well before retirement, individuals and couples need to think about planning ahead to ensure their wishes are met if they find themselves in a position where they can’t make their own financial decisions.

Living longer, and the potential for elder abuse, are two of the biggest issues facing retirees, according to the new chief executive of the Self-Managed Superannuation Association, John Maroney.

In an interview with InvestSMART, Maroney says it’s imperative that individuals have adequate income in retirement to live both securely and with dignity.

Longevity risk

“If you want to play safely you should be planning for a 30-year retirement period,” Maroney says. “If you work until 65 there is enough risk that you will live into your 90s that you should be planning to live into your 90s, and saving for it.”

Maroney says the amount of money required to achieve a secure retirement for the rest of one’s life would need to be between $1 million and $1.6 million.

“That’s the sort of money you need – not for everybody, but for those who are relatively better off and want to have a secure retirement, that’s not an unreasonable thing to be aiming for,” he adds.

“A lot of people won’t get there, but for those that can get there I think it’s great for them and their partners. It’s great if you can, because if you’re living into your 90s there’s the known costs of just normal expenditure … and if you’re renting in retirement you will need another few hundred thousand dollars to pay for your living costs, and you will have potential higher health costs as you get older.”

Maroney says that the majority of Australians are still largely relying on the government Superannuation Guarantee levy, which is currently 9.5 per cent. SMSF trustees tend to be more proactive in contributing extra funds to super, but not all do.

“For a young person that’s got 30 years in the workforce they need to save closer to 20 per cent than 10 per cent, because of low interest rates and the life expectancy is increasing.”

Loss of capacity

Maroney also cites a recent report from the Australian Law Reform Commission into elder abuse as another key issue facing retirees, and notes that proper estate planning early on is essential.

He says 55 per cent of SMSF members aged between 55 and 75 face a potential long-term risk around trustee capacity in the future.

“People need to think through seeking out financial advice. There are risks for people if they don’t do the advanced planning when they’re young enough and mentally active enough to be able to do it. Because they then run the risk that someone else may have to do it for them.”

Maroney says estate planning will be a risk for people, especially those with significant amounts of money.

“It’s an outcome of a system where if you need to save individually to cover off the risk of living into your 90s, and you die in your 60s, then there is going to be a significant estate pass over to your dependents. And that needs to be thought over carefully as to how that’s going to work.

“So that people who are dying prematurely and then leaving what would have been their own retirement assets to their dependents, they need to make sure they have structured their wills and their superannuation death benefit nominations in a way that actually does produce the outcome they’re wanting.

“There is an area of reducing mental capacity, which means planning well in advance. Your investment strategy for the fund needs to plan for the potential loss of capacity.”

Maroney says the SMSF sector will continue to grow strongly, and he expect total assets to double from the current $700 billion over the next two decades.

“I think SMSFs will remain a very dominant part of the post-retirement sector. A lot of people have said they do want to have more control over their own destiny, more direct investment choices and in where they put their money.”

Improving diversification

But he also notes that although there is a very strong direct ownership of shares as well as holdings in managed funds and cash elements, there is low exposure to international holdings.

“I think that’s something that we would be encouraging the advisers and the trustees themselves to think more about, because Australia is a relatively small proportion of the overall international investment scene and is very much dominated by financials, resources, and telcos.

“But if you’re wanting to get a more diversified investment portfolio then I think there is a lot to be said for looking at the offering outside. Exchange traded funds are making that more viable, so I think the opportunities for the smaller investors with their self-managed super funds to get into a broad range of the investment universe, I think the timing is looking pretty good.

“I would expect to see a shift towards international over the next five years in that area, either directly or through Australian opportunities to do that. Increasingly there’s players on the Australian market that get a lot of their revenues offshore as well.”