$1.6 million cap unlikely to derail retirement

The proposed introduction of $1.6 million cap limiting the amount of super that can be transferred into a tax-free pension, will not significantly derail retirement plans for the majority, according to a study by Milliman.

The analysis for a hypothetical 65-year-old pensioner, conducted by an actuarial and consulting firm, proved that there was an almost 94 per cent probability that $1.6 million would be enough to sustain a $50,000 annual income for a 65-year-old male retiree with a life expectancy of 87.

However, the study said that this probability was likely to decline slightly in case of a 65-year-old female retiree because of an expected longer life span of 89.

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This income should be still enough to support a comfortable lifestyle, according to the Association of Superannuation Funds of Australia's (ASFA) Retirement Standard, which estimated a single retire would need an annual income of $43,184 while $59,236 should support the same lifestyle for a couple.

Miliman also conducted a similar analysis for people with longer life expectancy and their chances of sustaining income to age 95 which proved that this longer lifespan would lower the probability that a $50,000 annual income would last until age 95 to 80 per cent.

However, this was still assessed as a positive result.

Additionally, Miliman's study confirmed that the government's claim was ‘broadly accurate' as an $83,000 annual income could be sustained for males with a life expectancy of age 87 around 70 per cent of the time, as there was about a 50:50 chance of sustaining this for a female with a life expectancy of age 89.

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Milliman is probably correct for people who own a home. However, I will continue to argue that people over 65 who have $1.6M in a tax free pension, and don't own a home will be disadvantaged substantially. The rent on a decent home in Sydney approaches $50k per annum, but for that person to buy a home in the same city they need more than their entire pension. So they then go on a Government pension.That is crazy! I shall continue to argue that $1.6M is insufficient to sustain a decent lifestyle for a 65 year old who doesn't own a home and pays rent.

What many seem to be missing here is that it's not a limit for funds in Super altogether, just what can be in a tax free pension environment. Nothing stops you drawing regularly from your superannuation account. The system is not sustainable in its current form, and regardless of your side of politics its for the benefit of all if we reset the rules now rather than stuff around and die a death of a thousand paper cuts. Faith in the system needs to be restored, pull the band aid off and then we can get back to work.

Milliman does not live in the real world, lives in a utopian world where there is no investment volatility.
Milliman ignores the historical fact that in the last four decades negative returns have been as much as 25% in any one year in practically every decade.
It is nearly well nigh impossible to recover from these investment losses.
Further, Milliman ignores that the amount of pension income payment that needs to be withdrawn each year increases from 5% at age 65, 6% from age 75, 7% from age 80, 9% from age 85, 11% from age 90 and 14% from age 95 plus.
If the Federal Government could guarantee no negative investment returns whatsoever and a positive 5% per annum return each and every year then probably $1.6 million may suffice to enjoy a very moderate lifestyle provided you owned your own home and the c.p.i. did not exceed 3% per year.

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