‘Irrational fear’ impacting SMSF longevity risk: CSIRO

Miranda Brownlee / Tuesday, 12 January 2016 / 0 Comments

Irrational fears among SMSF trustees regarding the amount of time before death is impacting investment decisions and leaving some funds unnecessarily exposed to longevity risk, according to the CSIRO.

As part of ongoing research conducted by the CSIRO, senior principal research consultant Zili Zhu said if SMSF trustees are able invest $840,000 at age 65 into a retirement income product like an annuity, they would receive an annual income of $42,000 for the remainder of their life.

However, he added, many Australians are still reluctant to consider any of these sorts of products since they place too much emphasis on the idea that they may die tomorrow, as shown by the research on behavioural economics.

“People are always worried that they’re going to die tomorrow, and they end up giving all their wealth to the banks,” said Mr Zhu.

“This is actually an irrational fear, because normally people don’t die tomorrow.”

Without investing in a retirement income product, retirees are exposed to longevity risk and could run out of money.

“What if there is, for example, another financial crisis and they lose half their SMSF balance?” he said.

One way to address this reluctance would be for SMSF trustees to slowly increase their exposure to retirement income products over time.

“If you slowly buy into it, then you’re still participating in the market, which means you still have a chance to increase your wealth, but at the same time, you’re removing the longevity risk,” he said.

This also means that if the market does go up, SMSF trustees still have an opportunity to capitalise on that, he added.

The CSIRO's research also showed that most SMSF trustees, particularly those with higher balances, are withdrawing from their funds at the minimum rate possible.

Mr Zhu said while the withdrawal rate increases to around 10 to 11 per cent among SMSFs with very low balances, past the age of 83 there is only a minor increase in the withdrawal rate of other categories of SMSFs.

“[Even] among low balances, the withdrawal rate is basically flat till after age 85, and for median and high balances the [withdrawal rate] only goes up slightly after age 85,” he said.

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