The Hidden Cost of 'Set and Forget' Super

Sequence of Returns Risk

Asset allocation in retirement accounts carries different mathematical properties than asset allocation during accumulation. The difference relates to cash flow direction.

During accumulation, negative returns combined with ongoing contributions result in purchasing assets at lower prices. This is dollar-cost averaging. During decumulation, negative returns combined with ongoing withdrawals result in selling assets at lower prices. The mathematics are not symmetric.

Consider two hypothetical retirees, both starting with $1 million, both experiencing 7% average annual returns over 25 years. Retiree A experiences a 30% decline in year one. Retiree B experiences a 15% gain in year one. Both withdraw $50,000 annually.

After year one:
Retiree A: $700,000 minus $50,000 = $650,000
Retiree B: $1,150,000 minus $50,000 = $1,100,000

Same starting point, same average returns, same withdrawal amount, but Retiree B has $450,000 more capital. This is sequence of returns risk. The order of returns matters when cash flows change direction.

For a 30-year-old experiencing a 30% market decline, continued contributions at lower prices represent a mathematical advantage. For a 65-year-old withdrawing funds, the same decline represents permanent capital reduction. The damage does not reverse when markets recover because the withdrawn capital is no longer invested.

Asset allocation as retirement approaches involves this asymmetry. What worked during accumulation operates under different mathematics during decumulation.

Super Balance Equalisation

For couples, superannuation balance distribution between partners affects multiple calculations. First, Age Pension eligibility. The Age Pension applies combined asset and income tests to couples. A household with $800,000 in one partner's name and $200,000 in the other's faces identical asset test results as $500,000/$500,000. However, contribution splitting and insurance costs differ.

Second, the Transfer Balance Cap. This cap ($2 million in 2025-26) applies per individual, not per couple. A couple with balances of $1.5M/$500K has combined pension phase capacity of $2.5M ($2M + $500K). A couple with $1M/$1M has combined capacity of $2M ($1M + $1M). Same total balance, different tax-free pension capacity.

The difference over 25 years, assuming 15% tax on accumulation phase earnings above the cap, varies by return assumptions. Historical calculations show differences of $20,000+ in some scenarios. This is purely structural, not performance-based.

Withdrawal Strategies

Multiple withdrawal strategies exist. Each produces different mathematical outcomes for income stability versus portfolio longevity.

Fixed real income: Withdraw a fixed dollar amount adjusted annually for inflation. If inflation is 3%, a $50,000 withdrawal in year one becomes $51,500 in year two. Provides stable purchasing power. Risk: portfolio may be exhausted if initial withdrawal rate exceeds sustainable level, particularly if markets decline early in retirement.

Dynamic withdrawal: Adjust withdrawal rate based on portfolio performance. If markets perform well, increase withdrawals. If poorly, decrease. Balances income stability with portfolio protection. Requires flexibility in spending.

Guardrail strategy: Set upper and lower bounds on withdrawal adjustments. If portfolio performs well, withdrawals can increase but only to an upper limit. If portfolio declines, withdrawals decrease but only to a floor. Combines elements of fixed and dynamic approaches.

Floor-ceiling: Guarantee minimum income (floor) via annuity or bonds, invest remainder in growth assets for potential upside (ceiling). Floor provides essential expenses, ceiling provides discretionary spending.

Each strategy produces different probability distributions for portfolio survival and income levels. Historical testing across all retirement periods since 1928 shows how each would have performed under actual market conditions. A couple starting with $800,000 using fixed real income at 6% initial rate faces different portfolio depletion risk than dynamic strategies that adjust to market performance.

The mathematics are deterministic given return sequences. The return sequences are probabilistic. Historical testing shows how each strategy would have performed across all historical retirement periods since 1928.

Age Pension Integration

The Age Pension applies both an asset test and an income test, using whichever produces a lower pension amount. The asset test reduces pension by $3 per fortnight for every $1,000 of assets above the threshold. That's $78 per year per $1,000, or 7.8% per annum.

For homeowners, the asset-free threshold is $327,000 for singles and $490,500 for couples. Assets above this reduce Age Pension entitlements. Superannuation in accumulation phase counts as an asset. Superannuation in pension phase counts as an asset (though income is assessed differently).

Small changes in superannuation balance can shift Age Pension entitlements by thousands of dollars per year. A couple with $495,000 in combined super receives more Age Pension than a couple with $505,000, assuming other factors remain constant. The difference relates purely to asset test application.

The income test applies deeming rates to financial assets. Below $62,600 (single) or $103,800 (couple), assets are deemed to earn 0.25%. Above that, 4.25%. These rates apply regardless of actual earnings. The income test then reduces pension by $0.50 per dollar of income above the income-free threshold.

Which test applies (asset or income) depends on individual circumstances. Both tests exist. Both apply to everyone. The lower result determines the pension amount.

Historical Stress Testing

Historical backtesting involves running identical retirement scenarios across every historical period. If someone retires with $1 million withdrawing $50,000 annually, what happens if they retired in 1929? 1965? 1973? 2000? 2008?

The mathematics use actual historical returns for Australian equities, international equities, bonds, and cash. The returns include dividends, inflation-adjustment, and franking credits. Data spans 1928-2025 (98 years).

Results vary by retirement start year. Someone retiring in 1928 experienced the Great Depression in year one. Someone retiring in 1974 experienced the 1973-74 crash. Someone retiring in 1999 experienced the dot-com bubble burst. Each faced different sequence risk.

Testing all historical periods shows the range of outcomes. Best case, average case, worst case. The worst case matters because it represents what has actually happened, not theoretical scenarios. If a plan fails in 1973 or 2008, it failed in actual historical conditions, not hypotheticals.

This testing exists. It can be performed on any retirement scenario. The data is public. The calculations are arithmetic.

Phased Retirement Complexity

For couples with different retirement dates, household income management involves multiple phases. During the overlap period where one partner works and one doesn't, household income includes salary, superannuation withdrawals, and potentially partial Age Pension.

A couple where Partner A retires at 60 and Partner B works until 67 experiences 7 years of mixed income. Partner A can access super (preservation age), but Partner B is still contributing. Partner A's super balance counts toward the Age Pension asset test, but household income includes Partner B's salary, affecting income test results.

Tax implications differ. Partner B's salary is taxed at marginal rates. Partner A's super withdrawals (if over 60) are tax-free. But Partner A cannot claim spouse contribution offsets while Partner B earns above thresholds. The Tax-Free Threshold and Low Income Tax Offset calculations change.

This is phased retirement. It exists as a mathematical structure distinct from simultaneous retirement. The calculations differ.

The Arithmetic

Unused concessional caps expiring: Potential differential of $50,000+ over time depending on marginal tax rate and compounding period.

Sequence risk from unchanged allocation: Portfolio longevity can differ by 10+ years depending on first-year returns. Sustainable income differs by $20,000+ annually in some scenarios.

Unequal balance distribution: Transfer Balance Cap utilization differs by up to $500,000 in tax-free pension capacity for couples with $2M+ combined.

Withdrawal strategy selection: Cumulative income over 25 years can differ by $100,000+ between optimal and suboptimal strategies, even with identical starting balance and returns.

These are calculable. They're arithmetic, not probabilistic. The only probabilistic element is future returns, but historical testing shows the range.

Total differential: $220,000+ across all factors in scenarios tested. This comes from structural decisions, not investment selection or market timing. Different domain entirely.

Historical analysis across 98 years of market data