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)
Male $178,808
Female $137,051
Average super at retirement (age 60-64)
Male $359,870
Female $289,179
(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?
Leave my superannuation alone, please. Of necessity, I have had to look after my own interests in retirement for many years now. Governments certainly did nothing to inform or help me during all those years so I HAD TO LEARN IT ALL FOR MYSELF! Having done all that, I think I’m pretty well placed to keep looking after things…
I am a self funded retiree who has been retired for 10 years. Reading articles like this makes me so angry. If our government set a good example then maybe I would take notice. However the cheek of them even suggesting how we should spend our super is disgraceful, especially seeing that they are the main reason we are in this current situation. Incompetent, corrupt and only interested in feathering their own nests, especially here in Victoria. No one will tell me what I can and can’t do with my super, in particular Dan Andrews.
My money – My choice.
as the late great Kerry Packer once said: the government has a very good history of spending but rate poorly with the decisions of where/ what/ how to spend it wisely.
if they want to give me all of my super then I might listen.
my work paid for my super. it has never been gifted
Just happen to notice the pollies, public servants, judges, etc. gave themselves a huge pay rise with no strings attached !
Need I say more !
A politically motivated statement as usual. From the Liberals previous performance you would have been a lot worse off under people like NAPTHINE !!!!!
Here in WA we had a ton of similar people but then came the landslide to get rid of the Clan !!! Wake up and see the light.
I just don’t get it. Its my money, I’ll do with it what I want to. I am approaching retirement in the next few weeks and the more I research what I can and cant do with my money, disturbs me. The legislation dictates to me that as a minimum I have to draw down 5% of my super account balance. What happens if I don’t? If I want to live on less, that’s my choice.
And why, if I am still working at age 75, why cant I continue to contribute to my super? My employer is mandated to continue with the employer contribution, but for some weird (unexplained)reason I cant. What happens if I receive an inheritance after I turn 75? Why cant I put that into super? These questions I have put to the Minister for Superannuation, without a response
Hi Stephen, you raise really interesting questions. Our super system is far from perfect and the mandated withdrawal amounts are certainly fodder for interesting debate, warmest Kaye
You can have two super accounts.
An accumulation account, that you can contribute to. There is no requirement to withdraw from it.
A decumulation (pension) account, where you have to withdraw a percentage per year, percentage depending on your age.
The main difference in the two accounts is the way the earnings are taxed.
realize a lot of that monies came from the employer. And a lot of the monies you take out is NOT taxed.
The rules around super and decumulation can certainly lead to discussions on the politics behind any legislation. That said, it is worth bearing in mind that settings are a Commonwealth Government responsibility, not a state government one.
With how things are going at present it is not easy to convince pensioners to increase their spendings. Easy to say for a politician , not for the average Australian. I am 68 and I am a heart and cancer patient……I am still working strongly convinced that my super will not last for a comfortable retirement!
Hi Giampiero, thank you for sharing your thoughts on this topic. We can help you evaluate if your current retirement savings might last the distance, based on your lifestyle goals and cost of living needs, in one of our Strategy Consultations. In doing this, it may also give you some more confidence in how long your super might last, if you retired now or slowly scaled back overtime, while also taking into account potential Age Pension benefits to help fund your retirement income needs. You can schedule one of these consultations here. We look forward to speaking with you. Thanks, Megan
As the last couple of years made it abundantly clear, it is near impossible to predict what the costs of living is going to do, even within one of two years, let alone 20 or 30. Inflation, international shortages, transport problems, price gauging, AU$ slippage (more expensive imports), weather events impacting on food prices and even insurance premiums, monopolies etc. are all impacting on our cost of living. It is the (increasing imo) uncertainty caused by so many factors that pushes us to be risk averse. All financial modelling has a set of assumption underpinning it. Many of those assumptions are often proven to be underestimates, leaving us worse off. The only defensive strategy is to have a buffer between you and the highly variable outside world.
Well said Francis. I agree.
Why do you publish some of these comments above from people who have no idea what Super is for and/or the rules surrounding the pension phase? It seems to me you are deliberately trying to create confusion instead of commenting and explaining the real reason Super exists and why there are limits and requirements for drawdown amounts, as well as the tax benefits such accounts have received which justify the rules.
Are you really trying to educate the public or just drum up more business immorally!
Hi Bob, we always invite discussion between our members as they enjoy commenting on their own experiences. We also want to reach a balance between providing education and insight. I’m sorry if you feel we are drumming up more business immorally. The rules on Super are complex and their application varies according to different needs and circumstances. There are only requirements for drawdown amounts if super is moved from accumulation phase to pension phase, to commence an income stream. Unless this action is intentionally taken, there is no requirement to draw down any amount. There are pros and cons for leaving super in accumulation phase or starting an income stream, and we’re happy to help our members understand the difference offering comparisons that are relevant to them, if they would like our assistance and support by discussing with us in one of our advice consultations for them.
Love the way Francis on August 30, 2023 at 3:18 pm Puts it –I cannot literate that good but keep your grubby hands off my super _I need the safety net in my mind as my life experiences dictate –I know no one who can Predict there own death month 6 months out -my mum is 99.5 she cannot say she will hit the ton or go a few years longer – she did a good dance on her 99th–whats to come at 100—so I have no bloody idea when my time is up but if I don’t get to spend my money in the way I want before I go , I have the comfort my kids will spend it the way they want-as it should be -not for a treasurer to decide what to do with it before or after my death