The narrative around superannuation in Australia has changed in recent times. A number of finance commentators have suggested that many Australians have put away far more super than they will need in their retirement years.
But is that really true? Not everyone thinks so.
Tim Mackay, an independent financial adviser at Quantum Financial, thinks we should be a bit more cautious in our approach. In an article he wrote for the Australian Financial Review last week, Mr Mackay took on the role of devil’s advocate.
“One policy position often put forward is retirees should have enough super to last until their neatly planned death date when all funds should be drawn down to zero,” he wrote.
“Nothing should be left for contingencies or the kids.”
But Mr Mackay argues that this theoretical approach ignores most Australians’ reality: “You cannot assume retirement is a line of smooth annual returns with controllable expenses and a known check-out date. Over the 25-plus years of retirement and growing, there are many expected and unexpected events to plan for. If you don’t, it’s highly likely you will run out of money.”
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Some might see that as fearmongering, but it’s hard to argue that over the course of retirement there will be unexpected ‘bumps’ along the way, particularly as life expectancy continues to rise.
On the other hand, it is impossible to deny that superannuation funds themselves will benefit greatly from Australians putting more into super, so they can hardly be blamed for advocating an approach that will result in us putting aside more than we are likely to need.
Striking a balance is the key. What that balance is might depend on one’s definition of ‘need’. Former ASIC deputy chairman Jeremy Cooper argues that our tax system is too generous to wealthy Australians.
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Mr Cooper says the Howard government’s decision in 2006 to make superannuation earnings tax free for people in retirement was extremely generous, making specific reference to franking credits.
In a recent interview with Geraldine Doogue on ABC’s Radio National, Mr Cooper explained: “Let’s just assume that I’m nearing retirement, and I could be earning, say, several hundred thousand dollars a year upon which I would pay absolutely no tax.
“Even better than that for me personally, but not so much for society, I would actually probably receive franking credit rebates as well, possibly in the tens of thousands of dollars,” he said.
Mr Cooper then provided this counterpoint: “Let’s just think I’ve got two kids who are 30 somethings. They’re carrying HECS debts and trying to buy a house in Sydney at the moment. They’re on relatively modest incomes upon which they’re paying more tax than I would be.”
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The issue, it would seem then, is one of wealth divide. The wealthier are being given concessions that will allow them to put away far more than they will ever need, while the less wealthy heading towards retirement might feel they are being forced to choose between having enough money to survive now and enough to see them through retirement.
Various financial commentators have called for a superannuation cap of $5 million, above which any balance would be subject to tax as ordinary income. Mr Cooper sees merit in that but also believes that any changes made by current or future governments should be gradual.
“[It’s a] very long-term bargain that you’re making with the government effectively. And so, if you were to change the settings for retirement, there would need to be a long conversation about it, and lots of warning for people as to what to expect if they were nearing retirement, time to rearrange their affairs, possibly while they’re in retirement.
Whatever changes the government might make, Tim Mackay encourages us to seek advice and plan carefully. “Plan for living longer and consider working longer, don’t be caught short.”
How do you feel about your retirement plan? Are you comfortable with your current balance, or do you think you’ll need more? Why not share your experience and thoughts in the comments section below?