Australian retirees will need more than half a million dollars

Australian retirees will need to accumulate over a half a million dollars to escape the ‘retirement trap’, according to the new analysis by BetaShares.

Ironically, the study showed that Australians at retirement age would need savings between $350,000 and $600,000, but increasing their savings may result in their income decreasing.

The anomaly, which is called the “retirement trap”, resulted from the progressive reduction of Age Pension entitlements as assets and income in retirement increase above certain thresholds.

These reductions in income could occur because such savings increases were unlikely to generate enough additional income to offset the pension entitlements that were lost and the analysis noted that Australian retirees could only escape this ‘retirement trap’ if they could accumulate well over half a million dollars as above this point increased savings would lead to increased income.

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“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 produce the reverse,” Roger Cohen, senior investment specialist at leading ETF provider BetaShares and the co-author of the analysis, said.

He explained that the current retirement system in Australia saw retirees drawing income from a combination of superannuation, the Age Pension and external assets, and these entitlement levels and associated reduction in the pension were the primary drivers behind the ‘trap’.

More specifically, for an individual, there was an income range between $174 and $2,026 per fortnight, where for every additional dollar earned, the pension was reduced by 50 cents and this effectively reduced the value of additional earnings for retirees in this range, according to the study.

On the assets side, for individual homeowners whose assessable assets are above $263,250, the pension is reduced by three dollars a fortnight (or $78 per year) for every additional $1,000 in assets. To offset this reduction, each $1,000, if invested, would need to generate an annual return above 7.8%.

“For a retiree caught in the ‘retirement trap’, additional assets are better off spent, or, if they are invested, must generate returns that are well in excess of 7.8% per annum to exceed the pension entitlements that are lost,” Cohen said.

”Unfortunately, such investments generally entail taking risk above levels which are commonly recommended for retirees.

“The transition from full entitlements to the age pension to no entitlements needs to be smoother. It is certainly an undesirable situation that for some people, more is not necessarily more.”