It’s time to bust the worst retirement myth of all.
Every day, another survey on retirement income appears. Most are created by those with a vested interest in getting their hands on your money. So, don’t fall for their so-called facts – particularly those on affordability.
We seem to be drowning in research, most of which is created by financial services organisations who have a vested interest in influencing your money decisions and persuading you to invest with them.
Sadly, many of these organisations will not actually help you increase your savings and subsequent retirement security as much as they claim. Often, they charge high fees, have been guilty of hiring rogue planners who commit white-collar crime and can rarely demonstrate the actual monetary value they say they deliver in the sphere of retirement income. So, when you read the next round of research claiming that a certain percentage of Australians are now retirement ready or are set to live a ‘comfortable’ life in retirement, make sure you challenge these statements rigorously.
Across the years, YourLifeChoices has surveyed its membership (currently 220,000) on various aspects of retirement and retirement affordability. As an independent publisher with no financial gain to be made, we ask and report without fear or favour. And by asking questions rather than assuming knowledge, we have learnt that the majority of Australians struggle to make their money last in retirement. While most wish they had saved more, many feel that the ability to fund themselves in retirement was denied to them by external factors over which they had no control. Such circumstances might include health, fragmented work history, lack of income due to caring for others, work in low-paid industries and other such factors associated with life-course disadvantage.
What is becoming increasingly apparent is that the single greatest advantage in retirement is not the level of your savings or superannuation but whether you fully own your family home, if you have a mortgage, or rent. And it is this fundamental aspect of home ownership which appears to be missing in action when it comes to the general perception and media reporting of retirement affordability.
So to take a case in point, the recently released CommBank Retire Ready Index states that 53 per cent of Australian households are expected to have enough for a comfortable retirement. But reading the fine print reveals that this survey, undertaken by Rice Warner, is based on the comfortable retirement standard as defined by the Association of Superannuation Funds of Australia (ASFA), which does not take into account whether the retiree is living in a fully-owned home, a home with a mortgage or is renting; nor does it consider debt repayments. The report does note this: “The data excludes the family home as this asset is not typically used for retirement income purposes”.
Of course, it is not – it is used to live in so the owner/retiree does not need to pay rent!
But more importantly, the home is now considered by most reliable economists as the fourth pillar of retirement income. Firstly, because the increasingly high rent costs will not need to be covered, but also because equity in the home can be released, the home might be downsized to improve cash flow and because it may ultimately contribute to what has become a user-pays aged care system.
So, owning a home is critical to your retirement affordability prospects and unless you have a cool million or two stashed away, will be the main difference between comfort and penury in covering expenses in the last two or three decades of your life. The myth that whether you own a home or rent is immaterial to your retirement readiness is simply false.
“No one will ever say you’ve got too much money in retirement, but a major factor in having enough is owning your own home – if you don’t, then you really don’t have security.”
~ The Barefoot Investor, Scott Pape, YourLifeChoices Retirement Update January 2017
So, when a financial institution tells you that the best thing you can do is to sock away more cash into your super, ask yourself the quintessential (Latin) question – Cui bono? – or who benefits? If your planner is part of a bank, ask about the bank’s charges for retail fund management versus those of other options. Ask them to show you a comparison. Still not sure? Seek an independent rating – for instance SuperRatings. Then ask whether your investment in this super fund will really return more than using the same money to reduce a mortgage so that you can enter retirement with less debt. And what about more money for household expenses? These are the really important questions you need to understand and ask if you are to make the most of the money you have – regardless of how much that is.
The law on financial advice in Australia is very clear. Only a licensed financial professional can advise you on how to manage your retirement income, and this advice must take into account your personal situation, your goals and it must be in your (the client’s) best interest.
What you read on this site and in newspapers, magazines, blogs or hear on radio or TV is commentary. It is extremely difficult to know how to get started when planning retirement or reviewing your financial situation in retirement. But a better understanding of the broad socio-economic trends is extremely useful as a backdrop to your own personal situation.
One such trend was revealed in 2015 by the Department of Treasury in the Intergenerational Report; a report released every five years. It noted that, by 2055, the proportion of Australians living in retirement on a full or part Age Pension will still be high – 67 per cent, compared to the 70 per cent in this situation today. The figure of 67 per cent is a projection, but from a reliable source.
To date, most retirees have entered retirement living in a home with no mortgage. This situation is changing rapidly, with those entering retirement today now carrying an average of $162,000 in debt. For the vast majority of retirees who are renting, the sums simply don’t and can’t add up. They cannot cover the rising expenses of energy, fuel, health insurance and rent.
For retirees with a mortgage, depending upon debt levels, it is also very challenging to try and maintain their pre-retirement standard of living – which is a hint why you are seeing so many traditional homes on the market, and new apartments and townhouses being snapped up by boomer downsizers.
So let’s retire the worst myth of retirement once and for all, the one that suggests retirement income has a ‘one-size fits all’ measurement. More than half the population is simply not ‘retire ready’ as the CommBank has reported – most of us are still struggling with how to cover the basics.