How best to use your nest egg

The Macquarie Dictionary defines decumulation as “to reduce (one’s assets, as savings, investments, etc.)”. According to YourLifeChoices member GeorgeM: “Decumulation is the process of deploying your savings to fund your retirement. In other words, it’s a technical word for how to take your hard-earned super savings away from you so that you leave behind next to nothing for your heirs!”

For YourLifeChoices’ 230,000 members, decumulation is a very important word. Accumulating retirement savings is only one part of the puzzle. Making sense of savings and using them to maximum advantage is the next key challenge.

Superannuation has been compulsory in Australia since 1992, but that leaves many baby boomers (those born between 1946 and 1964) with less than a complete working life of contributions. The nest egg, whatever its size, needs to be handled with care.

But, of course, retirement is not just about the money.

The World Economic Forum (WEF) said in its white paper, Investing in (and for) Our Future, that accumulating wealth during working years was not, by itself, a means to a good retirement.

The WEF report acknowledged that a good retirement was linked to health and the fulfillment of any ambitions, such as spending more time with family, cultivating hobbies, travelling and doing community work.

But, health aside, the size of the nest egg will have a big bearing on the breadth of retirement objectives. As will that word ‘longevity’, which both delights and daunts.

The report concluded that retirement account balances were not increasing sufficiently and that many retirees around the world would outlive their savings by as much as a decade or more. It did not take into account countries’ pension schemes.

In Australia, the WEF calculated that 65-year-olds, on average, had enough savings to cover 9.7 years of retirement income. That left the average male with a gap of 9.9 years and women, who live longer, with a 12.6-year gap that would need to be covered by the Age Pension.

Report co-author and head of institutional investors at the WEF Han Yik said: “The size of the gap is such that it requires action from policymakers, employers and individuals. Unless more is done soon, retirees will have no choice but to tighten their belts and pre-retirees will need to postpone retirement. You either spend less or you make more.”

The report also stressed the need for decumulation strategies to be flexible.

In its global comparison, the WEF gave Australia a tick of approval for addressing the topic of decumulation. 

It said: “The Australian retirement system, dominated by superannuation, is one of the most well developed from an accumulation perspective, with high levels of coverage, mandated levels of savings and strong investment architecture.

“However, the Government has stated that the retirement phase is underdeveloped and so is working on bringing forward a retirement income framework with the objective of putting in place Comprehensive Income Products for Retirement (CIPRs). CIPRs will have to provide:

  • efficient, broadly constant income
  • longevity risk management (income for life)
  • some access to capital.

The WEF warned that while knowledge, or “financial literacy”, should allow retirees and pre-retirees to be able to rationally evaluate different decumulation products and determine their own decumulation strategy, the array of products and services might be overwhelming for many.

“Several studies/research papers have found that when faced with the complexity of the retirement landscape, people were prone to ‘switch off’ and defer decision-making or simply chose the path of least resistance,” it said.

“While providing financial education should be an aim of both governments and employers (particularly for employers, given the trust that individuals have with their employers – 79 per cent of adults trust their employer to give sound, independent advice), there needs to be further consideration on how to approach decumulation at the societal level.”

The WEF places great value on financial advisers, but in the wake of Australia’s financial services royal commission, rebuilding trust in the sector is an ongoing goal.

The report says that because every decumulation strategy will be different due to personal circumstances, access to advisers who can help guide and potentially implement decisions “will be vital”.

“A recent study in the UK found that ‘those who take advice are likely to accumulate more financial and pension wealth, supported by increased saving and investing in equity assets, while those in retirement are likely to have more income, particularly at older ages’.”

The WEF acknowledged that the use of robo-advisers, which could be offered at a fraction of the cost of human advice, would grow, though speaking to a human financial adviser, particularly at key life stages, would continue to have appeal and value – “albeit with a set of strict competency standards and delivered at a cost-effective and transparent price”.

The report stressed that the ability to be able to respond to significant events was important.

“People tend to separate their money into different categories for various purposes, e.g. emergency cash pots or vacation savings. It is important that any decumulation strategy be responsive to how people intend to manage their finances.

In May, the Federal Government promised a review of the entire retirement income system, including superannuation, pensions and taxation, as recommended by the Productivity Commission (PC) late last year. Details are yet to be provided, but CIPRs are expected to be an important component.

Grattan Institute fellow Brendan Coates said the review was long overdue.

“We need to work out the target for an adequate retirement income and what the trade-off should be between living standards while working versus in retirement,” he said.

“We still haven’t worked out what the purpose of the system is and how the different parts of it work together …”

In a new set of research briefs from the ARC Centre of Excellence in Population Ageing Research (CEPAR), lead author and senior research fellow Rafal Chomik said: “Much thought has gone into accumulating superannuation, less into its decumulation.

“Australia is the only OECD country that has a mandated pre-funded accumulation structure without a mandated decumulation structure.

“… how Australians spend their super is set to change in the next few years. A policy framework is under development to require fund trustees to offer risk-pooling products to members.

“For the superannuation sector, this could be a new opportunity. For government, it comes with concerns that the inefficiencies that have plagued the accumulation phase could also translate to inefficiencies in the retirement product market.”

CEPAR chief investigator Michael Sherris, a professor of actuarial studies at the University of NSW, said that individual companies did not generally turn superannuation assets into retirement income products, leaving retirement risks with consumers.

Retirees receiving private income streams tended to rely on phased withdrawals, with no cover against longevity, investment and inflation risk, he said.

Professor Sherris also noted that the subject of super decumulation was a “live debate”.

Do you believe you are doing a competent job of handling the decumulation phase of your retirement? Are you getting professional help?

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Written by Janelle Ward

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