Busting retirement myths: The five biggest fallacies

Making mistakes is part of the human condition. There are very few things in this life that are totally irredeemable. So knowing you can fix mistakes comes as a great relief. The belief that organising your retirement funding is a one-off project is one of the biggest fallacies when it comes to what is a decades-long journey.

Today we shine a spotlight on five very common retirement myths and how to avoid them to increase the likelihood of maximising your retirement income. Understanding the opportunities inherent in these myths enables you to create your highest possible income.

Myth #1: 

Managing super is a set and forget proposition

No, no and no again. Managing super is an ongoing task, albeit one that can be simplified and streamlined with the right information and support. Many Australians’ super balances are now quite significant; a flow-on from the fact that we’ve had mandated super contributions for more than 30 years now. There are multiple ways to access these sizable savings, and different times when it’s appropriate to do so. And other times when, rather than drawing down,  you can top up your super if you have the funds. All of these decisions will depend  upon your personal circumstances and the most relevant rules to make sure that you maximise this particular pot of savings. Here’s a quick example of how your interaction with super can change over the journey.

Jane didn’t feel ready to give up work at 60 but did wish to cut back her hours. She decided to use a Transition to Retirement (TTR) strategy to access her super to supplement her salary, while continuing to contribute to her fund along the way. At age 67 she decided to cut back further and applied for an Age Pension. She withdrew some super as a lump sum and moved some funds into an Account-Based Pension to top up her part-Age Pension payments. Four years later she felt that she would be better off living in a retirement community, so she sold her three-bedroom home and used some of the proceeds as a downsizer contribution to her super fund. She is still working part-time and her employer still contributes to her super as part of the Super Guarantee.

As you can see there are many different ways that super goes in and out of your account. The aim is to access your super in a way that ‘smooths’ your retirement income. Knowing which rule suits you best – and when – is critical. 

If you would like to learn more about how you can use super in the ‘smoothest’ possible way, a consultation with a Retirement Essentials adviser means you can see spending projections ‘in real time’ while discussing the rules you need to know to support your decision-making.

Myth #2:

You need $600,000-$1 million for a comfortable retirement

This is one of the most persistent and damaging myths about retirement income. It simply won’t seem to go away, and it is neither true nor helpful to those planning retirement. These lofty targets have been widely promoted by the superannuation industry, possibly as a way of encouraging saving. But such unrealistic goals have had almost had the opposite effect. That is because they are simply ‘pie in the sky’ for most people. The median super savings for pre retirees (age 65-69) are $213,986 for men and $201,233 for women. So if we were to follow the logic that anyone with less than $600,000 won’t be ‘comfortable’ then we are saying that the vast majority of retirees will be very miserable, as they have just 20-30% of the optimal amount. These rough numbers simply ignore the role that the Age Pension plays in the retirement of the vast bulk of retirees. The experience for most retirees is that a mix of Age Pension, super and other assets allows them to enjoy a dignified and comfortable retirement.

Myth #3:

I’ll never get an Age Pension

That is a statement often quoted, but only factually true for the 20% of older Australians whose income and/or assets remain above the part-Age Pension thresholds all the way through to the end of their lives. The facts tell us that almost 70% of 67-70 year olds now start retirement on at least a part-Age Pension and within 15 or so years, when they reach their 80s, over 80% will be accessing a pension as they will have spent some of their retirement savings. This entitlement brings with it other advantages, including an automatically awarded Pension Concession Card (PCC) which offers medical, pharmaceutical, transport and energy discounts. And whilst there is loose chatter about the Age Pension becoming ‘unaffordable’, the cost to the Federal Government of this income support is being overtaken by the cost of concessions on superannuation savings. The Age Pension is actually becoming easier for the government to fund, not the opposite.

If you would like to take a long term look at your own Age Pension eligibility over time, Retirement Essentials safe spending simulator will show how the pension becomes available as your super savings reduce.

Myth #4:

You’ll run out of money before you die

We’ve addressed this major misconception many times before, but the sentiment seems to persist. Survey after survey suggest that almost half retirees have strong concerns that their savings will run out. Yes, it is possible to spend all your super. That’s your choice. But as we noted above, the median super at time of retirement is above $200,000 for singles and above $400,000 for couples. Most will choose to convert at least a portion of these savings to a retirement income stream and use this income to top up Age Pension entitlements. If the single and couple have no other savings, but do live in their own home, they will still be well below the full Age Pension assets limit, and probably the income limit as well. They are unlikely to run out of money if they are receiving a full pension and topping up with super. Their super savings will decline slowly, particularly as the minimum withdrawal requirements increase as they age but unless they spend well are unlikely to run out.  Even if they  do decide to spend the full $200,000 or $400,000 then they will still receive the Age Pension – technically, they still haven’t ‘run out’.

How long will your super and savings last in combination with Age Pension entitlements is easily explored using Retirement Essentials safe spending simulator.

Myth #5:

You need to stop work to access retirement income

Wrong, wrong and wrong again. This is one of the legacy beliefs from ‘old school’ retirement when the cardigan, slippers and gold watch were the symbols of leaving work forever. For a variety of reasons – be they health, financial, emotional or practical – many Australians who leave full time work now choose to move to part time or project work or volunteering activities. People move in an out of retirement as opportunities come and go. So retirement income has to match these movements and provide as steady a flow of funds as possible, allowing people to continue to contribute as long as possible. There remain severe skills shortages in many industries. This is part of the reason that the Work Bonus credit was increased to $11,800 per year, so that those who had stepped back from employment could re engage without losing Age Pension entitlements. You can access your super and keep working. You can receive an Age Pension while working, as long as your income is below the income limit. Older Australians are being encouraged to stay in touch with the workplace as much as possible and it seems to be benefitting all generations.

If you are struggling with work decisions and how they might affect your income, a forecasting consultation with Retirement Essentials’ advisers will allow you to check your options and ask all your tricky money questions. 

These five myths lead to opportunities. Yes, the rules can be complex, with many age or stage or relationship dependent. The more you know the less likely you are to make a costly error. Maybe you can fix it, but avoiding it in the first place is clearly the best plan.

How are you faring?

Does maintaining reasonable retirement income feel like a minefield?
Or do you feel you’ve got a good grip on the most important aspects?