Three things you can do
FOMO and FONK are well documented. Fear of Missing Out and Fear of Not Knowing can guide human behaviour in dramatic ways.
But beyond the more superficial social media application, these sentiments are very relevant for retirees.
The tough fact is that many retirees do miss out – and it’s mainly due to their ‘not knowing’ what they don’t know.
In a recent address at an industry conference, Retirement Essentials co-founder, Jeremy Duffield, nailed the three factors that can inhibit retirement income results for Australian retirees.
And according to Jeremy’s ‘back of the envelope’ calculations, getting one or more of these factors wrong is amounting to a total cost to retirees of $4 billion annually. That’s a high price to pay for ignorance of the rules and opportunities associated with retirement income.
Every retirement journey is different. So generalising about the ways different people can specifically improve their bottom line is not that useful. But knowing the three key areas of focus identified by Jeremy can help you review your own actions and timing to see if you might stand to gain.
Jeremy has had forty plus years of experience in finance and retirement income. Here are his three ‘aha’ observations on the main ways retirees can avoid missing out on income.
- Getting all due government entitlements
- Moving from accumulation to tax free pension accounts
- Getting asset allocation right
Let’s consider them one by one.
Getting all due government entitlements
Ensuring that you secure your Age Pension, if entitled, is obvious. Or is it? And are there other entitlements that you could have, but if you don’t know what you don’t know, you fail to apply.?
Jeremy points to research that shows the greatest pain point in the lives of older Australians is applying for the Age Pension. And that a startling 80% want help to get it and keep it. And this applies, by age 80, to 80% of the population who will then be entitled to at least a part Age Pension.
Perhaps because of complex rules or a low desire to begin a Centrelink application, our research shows only 44% of Australians have applied on time, 32% apply a year late and 16% apply more than three years late. According to Jeremy, this equates to a total loss of about $2.8 billion in retirement income each year.
Then of course there is the Commonwealth Seniors Health Card (CSHC), which can deliver concessions worth between $2000 – $3000 each year. This card is neither well known nor properly understood. But now that the income thresholds have been lifted to $90,000 for singles and $144,000 for couples, it’s extremely relevant to the vast majority of self-funded retirees. Yet few have made a move to get one. Again, this could be due to procrastination, uncertainty, fear of dealing with Centrelink, or other misconceptions. Whatever the delay in understanding and securing your government entitlement, it’s fair to say this money would be better in your pocket than the taxman’s.
Moving from accumulation to tax-free pension accounts
Here Jeremy quotes annuity-provider, Challenger’s, research which shows that 30% of the assets of members of super funds aged over 65 are in the accumulation phase. This means they have yet to reach the tax free decumulation phase. This applies to a hefty 1.2 million accounts. Again, his sums show there is about $1000 per year which these members miss out on, based on an average super balance of $140,000 for such members. Although Jeremy notes that there are a handful of instances where such a move is not wise, generally speaking, this is an effective way of increasing retirement income.
Does this apply to you? Is your money in accumulation when you could actually be earning more if it was moved to decumulation? Here’s some details of the pros and cons of this move.
Getting asset allocation right
Jeremy’s third ‘aha’ moment came when he looked at statistics on where retirees hold their savings. His conclusion is that there is too little in super and too much in cash. Recent Retirement Essentials’ member data shows:
- 40% have left super completely
- 31% are invested only in cash
Of those in cash:
- 18% are in transaction accounts
- 57% are in savings accounts and
- 25% are in term deposits
Yes, interest rates are increasing, but with likely returns of 0% on transaction accounts, less than 0.4% for savings accounts and less than 0.5% for two-year term deposit accounts, this pales in comparison to the expected December quarter inflation rate of nearly 8%.
Jeremy believes that having all your savings in any one asset class is unwise – but having it all in cash means you may be under-utilising your hard-earned savings. Additionally, the majority allocation of 57% of these funds in accounts paying zero or next to zero is probably a wasted opportunity, particularly for those on low incomes. It pays to shop around for better rates.
‘It may be that these retirees value ‘safety’ in some way that doesn’t allow them to be comfortable with more diversified portfolios. It’s important to work with a client’s risk tolerance at all times. And clients must always be supported make decisions which mean they will sleep well at night. But they also deserve to know that there are other options that deliver both a good sleep and higher returns!’