The missing link – how best to use the retirement nest egg

Making sense of retirement savings – and how best to ‘spend’ them.

The missing link – how best to use the retirement 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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    To make a comment, please register or login
    21st Jul 2019
    WTF the LNP government needs to fix the appalling Deeming rate for cash Term Deposits over 85K for couples. It is straight out fraudulent behaviour robbing pensioners and part pensioners. No senior citizen deserves to be treated in this manner!
    10th Oct 2019
    Deeming rate has nothing to do with cash rate but is what people can actually earn on their investments. With many people earning over 10% last year 3% deeming is on the low side.
    10th Oct 2019
    If you do not like the deeming rate start spending the dough or invest in shares and take the risk associated with that. I started decumulation the day I retired and have a bit less every year. The savings you do during your working life are here to enjoy your retirement years. So many people want to leave a large amount behind, leaving the family home or apartment should be enough. A large part of the savings are spent on our health insurance, not rapt with that but at my age I cannot opt out.
    10th Oct 2019
    Deeming rate is set on purported return on money deposited - not invested. Hence the current high rates are wrong.

    There is nothing to prevent the government making a clear calculation of actual return - all bank figures are in the ATO's database... and Colonel c'Link claims to be linked directly - so they are either lying or are just cheating..

    No government ever lets go of a 'good thing' unless they have to.... our job is to make them have to ....

    24th Jul 2019
    You are missing the point, Tricky. While your focus is very limited on Deemed Income, the entire strategy of "decumulation" is a much broader strategy to destroy Retirees' wealth - to benefit the political agendas (budget spend on retirees) and financial companies (new products to destroy your wealth with income for them).
    Not only Deemed Income, but the Assets Test, as well as some moves to include your home into the assets test, and forcing you into low-return CIPR products rate, are all likely as part of rolling out this agenda.

    Retirees need to WAKE UP, DEMAND getting Universal Age Pension with NO Tests, and get Govts and Financial Companies OUT of their lives.
    10th Oct 2019
    Absolutely correct, George.
    10th Oct 2019
    What I truly love about the current LNP is the way their antics focus the mind on the daylight robbery that is the current lot of the peasants... ham-handed is not a strong enough word....
    10th Oct 2019
    Agree with GeorgeM
    The perverse outcomes of the asset taper test means that Self Funded Retirees would need about $2 million in super just to match the centrelink aged pension. In safe investments. Including the add on benefits.
    That is not fair whatsoever !! It is a perverse outcome that a couple basically need about $2 million to earn safely the equivalent of the full aged pension.
    See here
    Basically like the middle and dark ages with the pollies handing themselves all the top benefits.
    Horace Cope
    10th Oct 2019
    Whilst kicking the government TREBOR (why is your name so important that you have to shout it) can you spare a thought for Labor's wish to deprive people of their income by refusing to allow them franking credits but allow union super funds to claim their franking credits. I work on the basis that all politicians are there for their own greed and power and ripping off the "peasants" is their daily work.
    The Sheriff
    10th Oct 2019
    Spot on, George. YLC continues to recommend financial advisers as well, despite empirical evidence that they are, on the whole, rorting scumbags and bludgers.
    10th Oct 2019
    In 2014 Liberals and Nationals tried to cut pension indexation, a cut that would have meant pensioners would have been forced to live on $80 a week less within 10 years. In the same 2014 budget the Liberals slashed $1 billion from pensioner concessions, a support designed to help pensioners with the cost of living.

    In 2015, as social services minister, Scott Morrison did a dirty deal with the Greens to cut the pensions of around 370,000 pensioners by as much as $12,000 a year by changing the Pensioner Assets Test.

    And in 2016 the Liberals tried to cut the pensions of around 190,000 pensioners as part of their plan to limit overseas travel for pensioners to six weeks.

    And for the last two years they have planned to scrap the energy supplement, cutting the age pensions of around 1.5 million pensioners.

    Australia spends 4.4 percent cent of GDP on on retirement incomes, well below the OECD’s 2013 average of 7.6 per cent.

    Stacking the 2019 retirement review does not bode well for retirees.
    10th Oct 2019
    Franked credits, as VCBB says, are tax withheld - they are not a bonus... ergo - there is zero difference IF YOU DO YOUR TAXES HONESTLY between a franked credit and an unfranked one.

    There was no issue with Labor's policy at all apart from their inability to sell it on simple facts.

    Once again - if a company pays a franked dividend of $0.70 + $0.30 franking, dividend = $1.00 If the same company pays a dividend of $1.00, dividend = $1.00.

    So anyone who still got a a refund of that tax withheld would still get that tax withheld return, same as Joe and Jo Bloggs on PAYE.

    The problem appears to be that some are somehow cirmumventing income so as to get that franking as a return, while still enjoying a heap of income. that is an entirely different issue for the ATO, but the undeniable reality is that abolishing franking credits entirely would ensure that no 'mistakes' - either accidental or deliberate - were made in calculation for tax returns.
    10th Oct 2019
    You have a problem with the name on the side of the truck?
    10th Oct 2019
    I'm an equal opportunity employer as well - I kick Labor and Greens and the rest as well when they stuff up.

    10th Oct 2019
    CashMobile, - that's the name of the game. If YOU choose to leave something to your kids etc, that is YOUR choice - not someone else's, and under no circumstances should any right to hoard riches be solely in the hands of those already well-off, so that the rich go on forever while the poor grow poorer.

    Nowhere in this discussion does the 'right' of any government rear its ugly head to deliberately decumulate retirees.

    Again, anything accumulated from honest toil after paying honest taxes (now thereby hangs another tale! - it is the opportunity in tax aversion that is the real issue here) is the sole and absolute property of its owner to do with as he/she chooses. NO government has a right to take any of it, including by reducing Pension Right by suggesting that a non income-bearing asset should reduce Pension.

    (I note that Keating's 'over-heated economy' did not apply to politician salary and perks etc... just simmering along nicely, thank you, peasants)...

    P.S. this term needs further analysis - we need to extend to DIScumulation - the calculated move to decumulate.... not to be confused with the loss of cumulus cloud due to climate change or its opposite - climate non-change.

    (Welcome to Around The World With Trebor) ...
    Chris B T
    10th Oct 2019
    At this Point In Time or Very Near Future is nothing about how One Uses this Accumulative Savings.
    The only Rule in Place is if One was to Claim OAP/Part OAP that is Gifting Rule.
    Do what you like as many others Have over the years prior to retirement.
    Buy Mac Mansion, Cabin on a Cruise Ship, What Ever.
    Once all gone Claim OAP.
    You may say a narrow view, this is how you could have spent your extra savings before Retirement Phase. Any way,The comment would be I did as I Pleased.
    Just Remember Politicians use there Spouse's House or Friend's House for Living away from Home Allowance.
    The comment Back Is It Is Within The Rules.
    10th Oct 2019
    Well said Chris B T - for a lot of us it is too late to act on that advice but the younger readers might learn something.
    10th Oct 2019
    I must admit I have a problen with the "intended", meaning of the word, - yes you can accumulate things, and as 'every Ozzie boy has his shed', there comes a point where you have to - yes decumulate is a good word there, - when every working suface has stuff on it and you can hardly get in there to find stuff, yes the only answer is decumulate, often a very stressful process, best left to your heirs if you can get away with it, but sometimes a combination of ruthless mates, garage sales, for sales on the local supermarket board etc will make quite a difference, but I don't know that it is the correct word for your financial affairs, investments and super balances are not things you will necessarily benefit by losing, particularly if you have to pay some quasi thief to 'decumulate' for you.
    Much I agree with Trobor in that way and these sales persons get hold of a word, or phrase, - eg "the Bottom Line", "at the end of the day" etc. and they pound you with it to get your signature, - their reward for the con of the day.
    10th Oct 2019
    Lookfar. I am still waiting for a reply from your post 2 days ago. I will ask you two questions. Are you carbon neutral in your life?... If not why are you killing my children and grandchildren by not becoming carbon neutral yourself? If I myself
    believe and preach a cause, then I would do everything to live a lifestyle that reflects that. . I just hope you live by what you preach. Please reply and answer my questions this time. Stay well Lookfar
    Horace Cope
    10th Oct 2019
    The questions are: "Do you believe you are doing a competent job of handling the decumulation phase of your retirement? Are you getting professional help?"

    If by doing a competent job of handling the decumulation phase is spending our super then I believe that we are. I wonder why they had to invent a new word for spending one's one money? Our super fund's average return is a little over 10% and we are required to withdraw 5% so, theoretically, we will never run out of super funds although the future buying power will de different.

    We are not getting professional help but we certainly did while still working and preparing for retirement. Our financial adviser did an excellent job with his advice and we still have our super with the fund which employs him. We enjoy a mix of super and age pension which suits our lifestyle.
    10th Oct 2019
    I’ve never had a problem decumulating.
    Decumulation = Pensioner Assets Management Card.
    More spin by then LNP
    10th Oct 2019
    Family trusts. Put your money, house, business and investments in that. See re Gina Rhineheart. Start an Investment company. Do that and all costs are tax deductible. car, phone, internet, papers, brokers fees, travel, etc and all franking credits can be offset even tho the owners earn more than any pensioner or any sfr. The rich are glad that none of you know how it is done. I am not happy that most on this site do not know how the rich sidestep the rules and pay less tax. I am not happy that we of modest means, that is low earning SFRS and pensioners constantly fight against each other. The rich assume we will be ignorant and so we will ignore that they are able to bend the legislation and pay less or no tax. Why is that? because we scrap like seagulls over a chip. whilst the rich and pollies eat a three course dinner.... and the rich and Pollies are right. We are stupid and ignorant plebs. Don't fight me stand up for a fight against elitism

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