Source : the age
As the cost of a comfortable retirement reaches a new high of $80,000 a year for couples, the government is stepping in to help more than 2.5 million Australians expected to retire in the next decade to budget their retirement savings.
The updated comfortable retirement lump sum for home owners aged 67 is now $730,000 for couples and $630,000 for singles, according to the Association of Superannuation Funds of Australia.
It’s an amount increasingly out of reach for many. The rising cost of living is a significant source of stress for pre-retirees, with 55 per cent expressing concern about its impact on their retirement plans.
Half of those nearing retirement worry their nest egg won’t last the distance, while nearly a third already feel financially behind for retirement, according to the Australian Securities and Investments Commission (ASIC).
This has prompted the government to introduce reforms to better oversee and understand how super funds help Australians during the retirement phase, an area often overlooked compared to the accumulation phase of super.
Stretching the nest egg
Super funds have been good at building nest eggs but not so great at educating their members on how to access it when they need it most. But that is beginning to change, with funds launching a range of digital products that transform how members understand and manage their retirement.
These include a range of lifetime income products that pay a guaranteed regular income for the rest of your life in retirement. Super funds Colonial First State, AMP, Equip Super, UniSuper, Hostplus, AustralianSuper, MLC and Brighter Super have all recently introduced such products.
The problem for retirees is that it can be difficult to safely spend while knowing that your super will last the distance.
Fearful of running out, many retirees draw down the minimum, delay travel, avoid helping adult children and cut back on discretionary spending to preserve their super balance as though spending is a mistake.
The question isn’t how much money has been saved in super, but whether the money will be enough to support the lifestyle retirees want to live, says Felipe Araujo, chief executive of Generation Life.
“While the instinct to preserve capital is understandable, retirees risk protecting their savings so carefully they miss the years when they are at their healthiest to enjoy them,” Araujo says.
Spending changes with age. Grattan Institute research shows spending starts to slow around 70 years of age and falls away more noticeably after 80. “The aim is not to pick one fixed number and assume it applies forever,” he says.
The early years of retirement are often when people are the healthiest, most active and most able to travel, renovate, support family or enjoy the experiences they have spent years working towards. Over time, retirement spending usually eases as people age.
Flexible savings
The key is to ensure that some savings stay flexible, while some income helps offset the risk that retirement lasts much longer than expected.
“The risk is that uncertainty gets in the way. When retirees are unsure how long they will live, what inflation will do, how markets will perform, or what future health costs may look like, many can become more cautious than they need to. They protect the balance so carefully that they can miss the very window they were saving for,” Araujo says.
“Rather than focusing on superannuation balance, the first step is to consider how much income is required. A balance tells you what you’ve saved, but it doesn’t tell you how much to live on.”
A good retirement budget should help people understand what they can spend in the earlier years, how that may change later, and what level of income gives them confidence along the way.
It helps to think about retirement spending in two buckets. The income you need for everyday life – bills, groceries, healthcare and other costs. Then there’s the money for things that retirement is meant to make possible – a cruise, a new motorbike or helping your children or grandchildren onto the property ladder.
These two buckets of money aren’t used for the same type of spending, so they shouldn’t be treated the same way, Araujo says.
Everyday costs are regular and need to be covered with confidence. “Lifestyle spending is usually lumpier, more personal and easier to put off – which is precisely why it needs a place in the plan, not just a vague hope that there will be enough left over.”
Meanwhile, the federal government website Moneysmart has launched a new retirement hub with tools, calculators and guidance to support retirement planning that allow users to see how much income they could have in retirement and explore different scenarios that could affect their income over time.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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