How will Australians Retire? Investigating Retirement Income Outcomes in a Low-return World

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The Australian Centre for Financial Studies (ACFS) and NAB have today released a report titled “How will Australians Retire? Investigating Retirement Income Outcomes in a Low-return World“. The report examines trends in household wealth over the past decade, and simulates future growth in household wealth for different cohorts of Australians in the years leading up to their retirement. The report was authored by Amy Auster, former Executive Director, and Martin Foo, a Research Officer. It is the seventh publication prepared by ACFS for NAB under their partnership agreement.

Using data from the Household, Income and Labour Dynamics in Australia (HILDA) survey, the report finds that Australian households are, on average, growing richer over time. However, this expansion of wealth varies dramatically across age groups, with older households having been the greatest beneficiaries over the past 12 years. Superannuation is an increasingly important component of wealth for most Australian households.

Cross-country comparisons suggest that Australian households and investors allocate unusually high proportions of their savings to equities, a risky asset class. They also allocate very low proportions to fixed-income products. This is partly a result of government policy (e.g. dividend imputation and differential tax treatment), various behavioural factors, and the small size of the domestic corporate bond market. High allocations to equities result in increased ‘sequencing risk’ – i.e. the risk that an investor will suffer capital losses, in the crucial years leading up to retirement, which cannot be recovered before or over retirement.

The report simulates the future path of household wealth for median households in various age cohorts under simple assumptions. Sampling from historical returns data, the report finds that equities generally outperform bonds over the long term (as expected), but that portfolio allocation decisions do not have a very large impact on retirement balances. Instead, the ‘flow’ effect of ongoing superannuation contributions tends to outweigh the return effect attributable to investing in growth assets.

However, there is no guarantee that future performance will match past performance. Low rates of return characterise financial markets both within and beyond Australia, leading to concerns about the ability of private pensions to support retirement living standards in the years to come.

The report “How will Australians Retire? Investigating Retirement Income Outcomes in a Low-return World” can be accessed through the link below.


Media contact details:

Professor Rodney Maddock
Interim Executive Director, Australian Centre for Financial Studies
T: +61 3 9666 1050

This report is the seventh in a series of reports prepared by the Australian Centre for Financial Studies (ACFS) for NAB.