Are you thriving or just surviving?
Ways to manage your retirement risk.
What does retirement risk look like to you?
For Rob, it means running out of his super savings well before his 80s.
For Ian, it means having unexpected expenses and being unable to meet them.
For Linda it means watching her hard-won savings being eroded by the rising cost-of-living.
In essence, retirement risk can be summarised as not having enough to do the things you want to do – both now and later. There is obviously no one solution for the diverse needs of different retirees, but there are some common-sense strategies you can use to overcome the most common concerns.
The increasing use of fin-tech innovations means that we can now project and predict the mathematical likelihood of lifespans and the return on our investments. We can also factor in inflation, tax, the probability of receiving an Age Pension and growth in super savings.
We still can’t see the future, but there are lots of basic calculations that mean we can see our likely retirement income.
Longevity
Rob was recently divorced, with a split in superannuation as part of the financial settlement. Starting over at 65 was not something he thought would happen. He’s now really worried that his money won’t last as long as he does and he has no clue how long that might be.
Can you mitigate this retirement risk?
Retirement income experts often speak about ‘longevity risks’ which is jargon for outlasting your savings. It’s a very common fear for retirees, but one that can now be better understood, planned for, and largely overcome. You just have to put in some work. The first task is to know what you spend now and will probably spend in retirement. Longevity calculators are becoming increasingly accurate at predicting likely mortality based not just upon your age , but also your parent’s health, your lifestyle factors, your physiological health and other aspects. Starting with your likely lifespan (in Rob’s case about 83), it’s possible to project your likely Age Pension entitlements, how your super will combine as a top-up and how other assets might contribute, as well as any work income. The Age Pension is a guaranteed income stream for all Australian residents aged 67 and over, so Rob cannot technically ‘run out’ – he will always receive a retirement pay cheque. Starting at 65 he has time to project his income possibilities and make adjustments to increase this amount along the way.
Unexpected adversity
Life was previously fun for Kerry and Ian with much of their time spent visiting grandchildren in Denmark and Darwin. But it became apparent that Kerry was struggling with basic daily tasks. Ian is now a primary carer, helping Kerry as dementia rapidly overtakes her independence. Ian is unsure if he can even afford the care she will soon need.
Can you mitigate this retirement risk?
Few of us see unexpected health diagnoses, redundancies or acute care needs coming our way. And few would want to. But planning to have enough emergency funds or access to savings does make sense. What is also sensible is being aware that such life events can happen to anyone and doing some financial scenario planning ahead of time so you have some contingency plans in place. Most retirees do not know the costs involved with aged care. Finding out is a good start if you are over 70. Additionally, you might explore how you might make your assets, including your home, could work harder if need be. You can’t see what is coming, but you can plan to have some cash on hand for emergencies and a clear idea how bills will be paid if work income suddenly stops or expensive medical care is needed. Retirement income forecasting consultations allow for all these scenarios to be understood.
Inflation
Linda is a widow with a low super balance. She receives the full Age Pension of $29,024 and tops this up to $34,000 per annum with an Account-Based Pension. But the constant news about rising prices makes her feel that her meagre savings are at risk. She feels helpless in the face of inflation which she believes is eroding her limited spending power.
Can you mitigate this retirement risk?
Linda is right to question the effect of rising prices on her savings and her ability to cover her bills. But things may not be nearly as dire as they seem. With most of her income from an Age Pension entitlement, she is largely protected from price increases because of the twice-yearly indexation of the base rate. This indexation is calculated based upon the CPI, the prices for specific pensioner households and median male wages, so the Age Pension rates will never fall behind the CPI. The current 12-month inflation rate is 3.8%. Linda’s super is most likely growing at a faster rate. The average growth super fund returns for the financial year 2023-2024 was 9.1%, more than twice that of the rate of inflation. However the CPI is a broad index of price increases. Linda may be feeling pain from increases in specific categories such as insurance or fuel which went up by much more than the CPI. If you wish to better understand how your own household costs have risen on a quarterly or annual basis, you can do so by following the Pensioner and Beneficiaries Living Cost Index or the Self-funded Living Cost Index. By scrutinising your own household costs you can identify categories with the highest price rises and then review if spending in these categories still fits within your budget. Yes, that is easier said than done, but it’s much more accurate and useful than being upset by the more general CPI ups and downs.
External economic volatility
Khanh and Mia are self-funded retirees. Khanh keeps a close eye on his investments, following the daily movements of the Australian Stock Exchange (ASX). So when the All Ordinaries index fell by nearly 600 points at the beginning of August, he told Mia that they would need to cancel their planned holiday to Japan. The cancellation cost $1100 but Khanh felt it was prudent to not go ahead with the two week trip.
Can you mitigate this retirement risk?
Financial markets go up, down and then up again. As with inflation, there is little individuals can do about the actual movements of these economic indicators. The ASX, despite many doom and gloom warnings of a collapse over the past few years, is currently trading near an all time high. Yes, markets are volatile, but risk does not mean loss. Ratings company Morningstar reports a 9.2% return on Australian shares over the past 30 years. So it’s worth bearing in mind that not every day will see an upward movement. Khanh’s habit of watching daily stock prices is not helpful. The ASX recovered from the 7859 low on 5 August and is now back to around 8300, so Khanh’s kneejerk reaction has cost him dearly. Taking a long view on investments makes a lot of sense. You cannot change market movements, but you can educate yourself as to the long-term returns on different asset classes and make informed decisions about the best mix for your own needs. This means understanding your own risk profile – your ability to cope with short-term fluctuations in pursuit of a longer retirement income goal. Other options Khanh can consider are rechecking his Age Pension eligibility if his investments are worth less over a sustained period and checking eligibility for a Commonwealth Seniors Health Card for extra savings.
Excessive debt
Mel is a 62-year-old nurse. She has a large house worth about $1.5 million, but only $125,000 in super. She would like to use the Transition-to-Retirement (TTR) strategy but with a $150,000 mortgage she feels trapped and that she needs to work forever. One more interest rate hike has become her greatest fear.
Can you mitigate this retirement risk?
Worry about debt is a very understandable human emotion. Most of us do. In previous decades most retirees would leave work with a home that was fully paid off. That’s no longer the situation. The cohort who will retire in the next ten years have a 50% likelihood of carrying mortgage debt with them. But yes, there are ways to tackle the challenge of debt. Mel has options even if she can’t see them. As a homeowner she has an asset most likely appreciating in value faster than inflation, so her debt is not insurmountable.
Her starting point is to review all her assets so she can understand her likely Age Pension eligibility. How much is she spending and how much would she spend in retirement? She is five years away from an Age Pension entitlement, so she could possibly reduce work by one or two days and take a small top up from her super. What she may not have factored in is that this means her super moves to decumulation and no further tax will be payable on these savings. Additionally, her ongoing work means super contributions will continue. To be paid by her employer until she finally resigns. Other options at her disposal are to consider changing her loan to a reverse mortgage or to explore whether the government’s Home Equity Access Scheme would work better. And if these possibilities don’t appeal, she may find that downsizing frees her from her mortgage and gives her the opportunity to increase her super. As we said, Mel has many options.
What’s your greatest retirement worry?
Is it a risk you can manage or does it get you down?
Retirement Essentials offers many adviser-led appointments to support both your need to plan for risk and minimise any financial consequences. These include the following consultations which are also hot-linked where appropriate in the articles above.
- Retirement Forecasting – assists you to develop a safe spending plan and how your assets and income could look in the future.
- Understanding more about your super – helps you to assess the options to make your super work harder and better.
- Maximising your entitlements – allows you to see if you can make any changes to maximise your Centrelink entitlements.
- Your home and your mortgage – considers the benefits of repaying or maintaining your mortgage in retirement.
- Are you a risk taker? – Understand how your tolerance for risk will impact your retirement income.
