The recent regulatory report card that found that super funds are not providing sufficient retirement income support has sparked a discussion about the role that funds can and should play in members’ finances.
But there is a fine line between helping retirees to manage the transition from savings phase to decumulation or spending phase. And a whole other exercise when, as reporter John Beveridge put it, funds take the role of ‘convincing retirees to spend their nest eggs’.
Let’s consider the background to this discussion.
The mandated Superannuation Guarantee was first introduced, at a rate of 3%, in 1992. It’s now 11% of ordinary time earnings, but it’s taken the full two decades since its introduction for most individuals to achieve viable nest eggs. We’re finally reaching the point where those currently approaching retirement have sizeable balances that will need careful management.
Typical super balances are:
Median super at retirement (age 60-64)
Average super at retirement (age 60-64)
(source Australian Tax Office and Association of Super Funds Australia, 2019)
With a spike in the number of older Australians now retiring, everyday 800 people reach the transition point from saving for retirement to drawing down/spending in retirement.
The rate at which you can spend is the critical equation here. As we’ve reported before, this amount is able to be projected based upon:
- Your life expectancy
- Your current savings
- Your current spending needs
- And when the Age Pension will become available, based upon your likelihood of passing the means test.
Combining these factors, as accurately as possible, is the best possible way to clearly and objectively plan how you will draw down your super.
But the retiree spending discussion gets heated when the maths of what retirees can or might do are conflated with perceptions of the ‘greater good’ for the Australian economy.
This came to prominence when one of the findings of the Federal Government’s Retirement Income Review (2020) revealed that one in three of retirees would leave all their savings in the form of an inheritance. The debate further intensified following research from annuities provider, Challenger and the National Seniors Association (NSA) which suggests that around one quarter of retirees have no intention of withdrawing any of their super.
Surely the preference to spend or to leave your capital untouched is really no one’s business but your own? BUT can this decision work against you if, by living only on your earnings or interest, you endure a miserable existence, just to leave your savings intact as an inheritance for the next generation?
A further complication of this debate is the argument that older Australians should be spending more as it’s good for the economy, with the same commentator declaring,
‘Australia can’t afford to let this issue slide for too much longer, with the economy really needing the spending kick start that only a less thrifty retirement cohort can provide’.
It seems strange that older Australians, having been told to save harder for retirement, are now seemingly getting the opposite advice. Spend up – the economy is reliant upon your largesse.
It’s far from useful to tell any generation what they need to do for the benefit of all, be it telling retirees to spend more, workers to save more, or younger people to have more children. We are all in this together, so a more nuanced discussion of how savers can and should spend is useful, but needs to be far more nuanced.
Putting aside the heated debate, it’s worth remembering that the best decisions are always based upon knowledge of the subject. It’s an intensely personal matter how you manage your resources and whether you leave most in the form of an inheritance. Or whether you spend more freely and enjoy a very ‘good’ life before you go.
The critical thing is to know what you can afford to do and to recognise where your comfort level sits.
This means going back to the basic checklist of questions:
- How long can you reasonably expect to live?
- How much do you need to support your preferred lifestyle?
- Which income streams are most suitable to cover this need?
- When will the Age Pension kick in?
- What do these projections of possible spending look like now, in 20 years and in 30 years’ time?
With this information at hand, your optimal rate of spending should be much clearer and -hopefully – entirely manageable.
If you would like to have an adviser step you through an analysis of your own longevity, income streams and likely Age Pension eligibility, the Retirement Essentials Retirement Forecaster consultation is designed to do just that.
What do you think?
Are you comfortable to be convinced that you need to spend more?
Or do you think this is simply overreach?