What’s wrong with retirement planning in Australia? Everything!
A retirement timebomb is ticking away, unnoticed by most, but one which means that most older Australians will live in poverty in their later years.
There is little point encouraging us to plan for our retirement income if we don’t know how to start, or when to start, and most importantly who to trust with our hard-earned savings.
Below is an edited extract of YOURLifeChoices website’s submission to the Australian Securities and Investment Commission (ASIC) National Financial Literacy Strategy 2014-16.
Older Australians, in particular those aged 50-75, have been overlooked in the discussions of financial literacy strategies which started back in 2005. Men and women in this cohort are at risk of an impoverished later life, as they have not been identified as a group needing URGENT information, support and strategies, with most of the financial literacy targeting being focused on younger people who will benefit from the Superannuation Guarantee Contribution throughout the course of their lives. Some older pre-retirees have no savings at all.
American research on pension planning (Chan and Stevens 2004) titled What you don’t know can’t help you neatly encapsulates the retirement conundrum in Australia. In this paper, Chan and Stevens note the danger of averages when measuring financial capability, and this is also the case in Australia. The averages mask a polarisation between those who are educated, solvent and financially capable and those who are not – the majority.
The ‘danger’ group is those aged 50-65 and moving toward a time when they will leave full-time work.
The vast majority will need a full, or part Age Pension. The Age Pension no longer provides an adequate safety net. For instance, the full Age Pension for singles, including entitlements, is approximately $3,000 below the ‘modest lifestyle’ defined by the ASFA Retirement Living Index. This amount automatically assumes the retiree owns their own residence outright. This assumption is fallacious and, as time goes by, fewer and fewer retirees will leave work without a mortgage on their home.
So we know that most Australians aged 50-65 are headed for a life of penury. As a consequence you would expect them to embrace the notion of retirement income planning in order to make the most of their nest eggs. Yet ASIC’s own measure of consumer engagement with planners reveals a low level, due to negative perceptions and outright distrust of planners. This is hardly surprising when ‘planning’ shadow shopping exercises and measures of the value added by planners confirm that it is a ‘vanilla’ experience for many, and negative for others.
So, whilst older Australians are severely underfunded for the longer lives they can now anticipate following full-time work, there are major structural barriers to their need to access independent and trusted advice/information.
The establishment of ASIC’s MoneySmart website has been successful to a degree, but few would claim that this is a tool which is sufficient in itself to help anyone fully plan and implement a retirement income strategy.
Underlying the current financial literacy discussion is an assumption of choice which is also worrying. Many Australians simply do not have the necessary confidence or knowledge to make useful financial decisions. Education and experience play a part, but the increasing complexity of financial products and the diversity of options confound all but the savviest of individuals. We need only consider the hundreds of changes to superannuation since it was first introduced, to get a sense of how diligent one needs to be to follow these changes, understand them, and use them to properly manager your own super fund or account.
Even financial journalists can totally misrepresent new laws or offer a poor explanation of the changes with significant omissions.
The reference to ‘trusted and independent financial advice’ and the suggestion that progress has been made in this area is wishful thinking. YOURLifeChoices website receives 10-20 questions regarding pensions, other entitlements and superannuation each week. People simply cannot work out, in the first instance, if they will receive a pension in retirement. The Centrelink/DHS website is neither user-friendly nor easily navigable. The best explanations on retirement income are on the NICRI site, but this agency appears to be underfunded and lacking promotional support.
So what are some of the gaps we have identified and seek to fill?
Let’s start with retirement income literacy. The definition of financial literacy leading to financial wellbeing begs the question of how we define financial wellbeing? The ability to self-fund retirement to the tune of 60-70 per cent of pre retirement income might be a goal worth stating and promoting? Financial wellbeing is a poor goal as it is neither specific nor measureable, and therefore too fuzzy to include.
Let’s redefine it to include capability, and an understanding of the basic information on pension eligibility, superannuation basics, how super is accumulated, enhanced and drawn down. Let’s also look at longevity risk as part of financial capability, with a better consumer comprehension regarding how long individuals are likely to live and how long their savings will need to last.
If these concepts cannot be explained in plain English both online and in free print brochures, then pre-retirees need some support face-to-face. The Centrelink FISO officers are a great resource, but also under promoted; most older Australians simply do not know they exist.
We are facing a retirement timebomb, but that doesn’t mean it has to explode to the detriment of older Australians across the country. If we act now, we can help those who are about to enter retirement the required support to make sensible decisions by offering accessible, independent and trustworthy financial information for all.
So let’s stop talking about it and do it before that bomb explodes.