Australians in self-managed super funds (SMSFs) are gambling with their retirement by not adequately managing longevity risk, according to Challenger’s retirement income chairman Jeremy Cooper.

While SMSFs have the largest average balances in the entire superannuation sector – about $900,000 per fund – Cooper believes this figure is skewed and creates a false sense of security.

He argues that the median SMSF has assets of only $470,000, or about $262 000 per person, not nearly enough to self-insure longevity risk.

Generally these members source longevity risk products, such as traditional life annuities, outside of their superannuation fund, with pricing set at the moment of purchase.

With SMSF members generally white-collar, wealthier and increasingly enjoying better health, retirement savings need to be stretched further than ever.

“There is no such thing as an average retirement,” says Cooper, adding that the problem was more one of product than advice when it comes to longevity risk.

“We have a lump-sum culture in Australia and we simply don’t examine annuity options as closely as we should.”

Cooper says each individual member in a SMSF should be looking at retiring with $790,000, significantly more then the industry recommendation of $430,000.

He cites the increasing likelihood that at least one of a retired couple will live for 25 to 30 years past the retirement age of 65.

“Most people won’t accept a 50/50 chance in any other aspect of life so why should they accept it in retirement?” he says.

“Removing longevity risk takes the coin toss out of the equation.”

According to the Association of Superannuation Funds of Australia (ASFA), a couple looking to achieve a ‘comfortable’ retirement will need to spend $55,316 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $31,767 a year.

The Australian Tax Office this week released a statistical overview of self-managed superannuation funds finding that, in the five years to 30 June 2010, the SMSF sector has been the fastest growing of the Australian superannuation industry.

During this period total super assets grew by 60 per cent, while SMSF assets have grown by 122 per cent.

SMSFs and longevity risk is the subject of Jeremy Cooper’s upcoming presentation to the 2012 Self-Managed Super Fund Professionals’ Association of Australia (SPAA) National Conference, which takes place in mid-February next year.