BetaShares has stated superannuation, external assets and the government’s age pension can interact to produce “unintended and undesirable outcomes” for certain Australians.
The ETF provider’s senior investment specialist Dr Roger Cohen has co-authored work conveying that for Australians at retirement age, with savings in the range of around $350,000 and $600,000, boosting their savings may result in their income decreasing.
The phenomenon coined the “retirement trap” is said to result from the progressive reduction of age pension entitlements as assets and income in retirement increase above certain thresholds.
BetaShares commented reductions in income can occur because savings increases are unlikely to generate enough additional income to offset the pension entitlements that are lost.
The analysis, using a “simulation of uncertainty for pension analysis” model, has pointed to more than half a million dollars as the threshold point for savings, where Australians can escape the retirement trap. Above this point, increased savings are meant to lead to increased income.
Five different investment strategies, ranging from 30 per cent to 100 per cent allocations to growth assets (conservative, moderate, balanced, growth and high growth) were tested, and under all of the strategies, the retirement trap was observed.
Dr Cohen commented: “Common wisdom tells us that accumulating more savings through our working lives should result in higher income in our retirement years.”
“However, our analysis shows that for certain people, under the current system, accumulating more money can actually product the reverse.”
The current retirement system in Australia sees people drawing income from a combination of super, the age pension and external assets.
The age pension is means tested, with the level of entitlement calculated using an income test and an assets test.
BetaShares reported that for an individual, there is an income range between $174 and $2,026 per fortnight, where for every additional dollar earned, the pension is reduced by 50 cents – effectively halving the value of additional earnings for retirees in the range.
In assets, for individual home owners whose assessable assets are above $263,250, the pension is reduced by $3 a fortnight (or $78 a year) for every additional $1,000 in assets. The analysis noted that to offset the asset reduction, each $1,000 if invested, must generate an annual return above 7.8 per cent.
Dr Cohen stated that for a retiree caught in the trap, additional assets are better off spent, or if invested, must generate higher returns which usually come from investments entailing risk higher than recommended for retirees.
“The transition from full entitlements to the age pension to no entitlements needs to be smoother,” he said.
“It is certainly an undesirable situation that for some people, more is not necessarily more.”
BetaShares has established a working group aimed at doing further collaborative research in the area.
