A new analysis by the Monash Centre for Financial Studies (MCFS) highlights the fragility of retirement outcomes for Australians.
Australia’s superannuation system is designed as the backbone of retirement security, yet the drawdown phase is fraught with uncertainty. Longer life expectancy, rising living costs and market instability mean that many retirees face difficult choices about how to sustain income.
The study, authored by Associate Professor Ummul Ruthbah and Dr Trinh Le from the Monash Business School, used Capital Market Assumptions developed by the Centre, to show that the sustainability of retirement income rests on three factors: the size of the starting balance; the mix of equities and bonds; and the sequence of market returns in the first years of retirement.
The MCFS Capital Market Assumptions incorporate inflation expectations, monetary policy settings and currency dynamics to provide a forward-looking view of returns and risks.
“The findings of the study are sobering,” Associate Professor Ruthbah said.
“Retirees with less than $250,000 face a high likelihood of exhausting their superannuation within a decade if they target a comfortable lifestyle. At balances above about $400,000, the chance of sustaining income rises to near certainty, regardless of portfolio design.”
The analysis also exposes a deeper structural challenge regarding gender gaps and policy implications.
The report states women approaching retirement hold balances 20-30 per cent lower than men, leaving them disproportionately exposed to depletion risk.
“For median female retirees ($212,000), even a balanced portfolio still carries material chances of exhaustion within a decade, while men with median savings ($283,000) face far more secure outcomes,” Associate Professor Ruthbah said.
“This gap has profound implications for retirement adequacy and policy design. It underlines the need for measures to boost women’s superannuation savings, whether through targeted contribution incentives, reforms to address career breaks and pay disparities, or enhancements to the Age Pension safety net.”
The analysis also challenges a common belief about investment strategy during retirement.
“Mixed equity-bond portfolios, which are investment strategies combining stocks (equities) and bonds (fixed income), provide the most consistent outcomes for modest balances,” Dr Le said.
“All-equity strategies deliver higher average ending balances but carry sharper drawdown risks, while bond-heavy portfolios virtually guarantee capital erosion when withdrawals are set at comfortable levels.”
According to the researchers, retirees with small savings can’t sustainably fund higher spending targets, regardless of strategy. Larger balances can withstand higher withdrawals, but overly conservative allocations virtually guarantee erosion.
“If someone has a low superannuation balance, one option is to adjust spending. Our study finds that when retirees target a moderate level of spending rather than a more comfortable lifestyle, the portfolio is more likely to remain sustainable over ten years, regardless of the asset allocation,” Associate Professor Ruthbah said.
“Another important consideration is maintaining some exposure to equities. Our capital market assumptions suggest that bond-only portfolios are unlikely to generate optimal returns relative to the level of risk taken over the long term.”
The research also highlights the importance of market losses early in retirement: for example, someone who retired in 2022 – a year impacted by market volatility that delivered negative equity and fixed income returns – may end up with a significantly lower portfolio balance after 10 years than someone who retired in 2023 with the same superannuation balance and investment strategy.
One approach retirees can consider is to reduce or postpone withdrawals from their superannuation during periods of significant market decline. More generally, retirees may benefit from adopting a flexible withdrawal strategy that adjusts to market conditions and personal circumstances, rather than relying on a fixed withdrawal rate regardless of investment performance.
For policymakers, the findings underscore the need to enhance safeguards for low balance retirees, particularly women, while ensuring that retirement portfolios strike a balance between growth potential and downside protection.
To read the report: Comfort or Collapse: Why Balance Size and Design, Not Just Returns, Decide Retirement.
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