New analysis from BetaShares superannuation and the age pension can have undesirable outcomes for some retirees, forcing them to ensure they have at least $600,000 squirrelled away ahead of retirement.
BetaShares senior investment specialist Roger Cohen's analysis shows that for Australians at retirement age with savings of between $350,000 and $600,000, increasing their savings can result in their income decreasing.
This retirement trap results from the reduction of age pension entitlements as assets and income in retirement increase above certain thresholds.
In bad news for many, this new analysis indicates that to safely escape the retirement trap retirees will have to have accumulated well over $500,000.
After the $600,000 mark, increased savings actually do start to equal increased income.
"Common wisdom tells us that accumulating more savings through our working lives should result in higher income in our retirement years," Cohen said.
"However, our analysis shows that, for certain people, under the current system, accumulating more money can actually produce the reverse."
As part of this new analysis, BetaShares has released a pension multiplier.
This is a number (greater than or equal to one) which represents the current or future income stream a retiree can expect relative to the age pension (for example, a pension multiplier of 1.5 means that income of one and a half times the government pension can be expected in retirement).
For an individual, there is an income range between $174 and $2026 per fortnight, where for every additional dollar earned, the pension is reduced by 50 cents.
This effectively halves the value of additional earnings for retirees in this range.
Cohen explained in terms of assets, 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 three additional $1000 in assets.
BetaShares said to offset this reduction, each $1000, if invested, must 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."