Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Complex super has retirees living in fear: Grattan report
Many people find retirement extremely stressful – despite the fact many have saved enough to live comfortably after permanently leaving the workforce.
It reflects a superannuation system that is simply too complex for retirees, according to a research report, Simpler super – Taking the stress out of retirement, by the Grattan Institute, an independent think tank.
It means few retirees draw down on their retirement savings as intended, with many being net savers, which is turning Australia’s multi-trillion-dollar compulsory superannuation system into a “massive inheritance scheme”.
“For most Australians, retirement represents a big life change. Instead of being paid a wage, retirees must draw an income from their savings, together with the age pension,” the report’s authors, Brendan Coates, Joey Moloney and Esther Suckling, write.
“They must do this while managing the uncertainty of how long they will live and how their investments might perform, as well as navigating the complex interactions of their savings with the means-tested age pension. And they must try get value for money from their superannuation fund.”
In what is an implicit criticism of superannuation funds, the authors argue retirees get little guidance about how to use their superannuation.
“While we’re working, key decisions about our superannuation are typically made for us – such as how much to contribute and how those savings are invested. But once we retire, the system casts us adrift.
“The little guidance retirees do receive is unhelpful, steering them into account-based pensions, which require them to manage their spending to avoid the risk of outliving their savings.”
As the report highlights, the fact that many retirees are financially stressed is occurring at a time when superannuation is becoming an increasingly bigger slice of the retirement income pie with many Australians now entering retirement with significant balances.
In 2022-23, 34 per cent of Australians who had retired in the past five years reported superannuation as their main source of income compared with 28 per cent who said it was the age pension.
Less than a decade earlier (2014-15), 28 per cent of those who had retired in the previous five years reported superannuation as their main source of income, and 38 per cent said it was the age pension. Today’s pre-retirees anticipate superannuation will play an even larger role in their retirement.
The number of retirees with substantial superannuation balances will continue growing, with the report estimating that by the 2060s many Australians will be retiring with nearly $500,000 (in today’s dollars) in superannuation.
By that time, retirement-phase assets will total $2.3 trillion or 65 per cent of GDP. At the same time, the share of retirees on the age pension is projected to fall from 71 per cent in 2023 to 57 per cent by 2063, and the share on the full pension falling from 44 per cent to 21 per cent.
These changes mean that retirees’ living standards will increasingly depend on how they use their superannuation in retirement, the authors write.
“But most Australians find retirement planning stressful with more than half of Australians older than 50 report being worried about their retirement incomes. These views come even though, objectively, retirees typically have the financial resources to enjoy a comfortable retirement.”
What the report is highlighting is that while superannuation – and the financial security it brings – should be taking the stress out of retirement, it’s having the opposite effect. To address this failing in the system, the report recommends three key reforms to simplify superannuation in retirement.
First, retirees should be encouraged to use a portion of their superannuation to buy an annuity from the government to pay an income that lasts them for the rest of their lives.
Second, Australians need better guidance to plan their retirements. The government should establish a free service to advise at least one-third of new retirees at an estimated cost of about $360 million over its first four years and $50 million a year thereafter. It would be funded by a levy on superannuation balances.
Third, the government should create a list of the top 10 superannuation funds, selected by an independent expert panel, and then steer retirees towards those funds, with the performance test and comprehensive assessments of fund performance by APRA extended to account-based pensions.
The Retirement Income Review concluded that retirees were generally reluctant to draw down their savings in retirement due to complexity, little guidance, reluctance to consume funds that are called nest eggs, concerns about possible future health and aged care costs and concerns about outliving savings.
The irony is that retirees are never been so financially secure or healthier to enjoy their lives. The challenge for government and the superannuation industry is to convince them of this reality.
