You’ve quit full-time work, now what to do with that nest egg?

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You’ve worked hard and are starting to think about life after full-time work. You have nearly $500,000 in superannuation and are thankful that Australia introduced compulsory superannuation contributions when it did. But you can’t stop yourself wondering: Do I have enough?

You’re not alone. Survey after survey finds that the fear of outliving one’s savings is one of the top fears for retirees. YourLifeChoices’ 2020 Ensuring Financial Security in Retirement survey found that of the 3000 respondents, only 13 per cent were confident their current savings and income would last for their lifetime.

You find plenty of articles on the topic, how much super do I need to retire?, but very little to help you work out what do with your super when you do retire.

From the government to the superannuation industry to the media – everyone is obsessed with saving for retirement, but without enough attention given to what comes after retirement. Yes, it is important to do whatever we can to maximise our retirement savings but for many of us, there is not much we can do, other than keep an eye on our superannuation, make sure we are in a good fund, and make additional contributions if possible.

Preparing for retirement is much more than asking, ‘Do I have enough?’
The purpose of saving for retirement is to produce income in retirement, but retirement income was mentioned only once in the recent Federal Budget, and that was a reference to the deferral of the Retirement Income Covenant. This covenant was first announced in the 2018 Budget and, if ever implemented, will require fund trustees to consider the retirement income needs and preferences of their members. It is now due to commence on 1 July 2022.

It’s time to start focusing more attention on what happens to Australians after full-time work, to start having more discussions about what comes next.

The key question to ask is: How much income will I have when I retire and how long will this last?

To help answer this question, you need to have some idea of what life after full-time work will look like, how long you might expect to live, and how to convert your retirement savings into retirement income.

Life after full-time work
Leaving full-time work is not an ending but a new beginning. Those contemplating retirement should start thinking about what comes next. The transition from full-time work involves understanding not just financial goals but also non-financial goals such as health, family and purpose.

Understanding life expectancy
Once you have started thinking about what life after full-time work might look like, it is time to assess different strategies and products. When considering the most suitable solution, first you need to estimate how long you could live.

Of all the risks in retirement, longevity risk is the one least understood. In simple terms, it is the risk of outliving your savings. Many base their retirement planning on life expectancy without understanding what this actually measures. It is the average for how long a group of people are expected to live based on age and gender.

Consider an average 65-year-old female born in 1955. She needs to plan to live to age 89 for a 50/50 chance her retirement plan will last as long as she does. What if she wants to be 80 per cent confident that her financial plan will cover her entire lifespan? Then she needs it to last to age 95. That’s around 10 years longer than the simple life expectancy. If she has a partner? Then they really need to plan for one of them to reach 100 to be confident.

The chart below shows the distribution of projected lifespans for Australia’s current population of 65-year-old females using mortality rates published by the Australian Government Actuary.

Producing retirement income
Pre-retirees and retirees need to consider the products that might produce retirement income. Unfortunately, there are limited retirement income product options in Australia, especially if you’re concerned about longevity risk.

The products offered by most superannuation funds are, at best, only a partial solution and a poor or inadequate one for those who live a long life. The current standard product offer is an account-based pension that does not protect against longevity risk.

One of the consequences of the account-based pension is the tendency to underspend in retirement. The majority of retirees draw down the minimum allowable amount – not because that amount fits their plan but because they are worried about drawing down more. This may result in an unnecessarily frugal retirement. If people had more certainty around their level of income and how long it would last, they could potentially spend with more certainty and have a more enjoyable lifestyle.

An Australian retiree looking for a more certain retirement income stream has little choice but to purchase a lifetime annuity. That might be suitable for some, but we need more choices to recognise that people’s needs in retirement vary.

Superannuation is not super yet
Increasing retirement balances is important but only half the journey. The primary objective of saving for retirement is not to accumulate wealth but to provide retirement income. The delivery of quality outcomes includes helping to convert retirement savings into suitable income streams, including protecting longevity and other risks. This is where more innovation is required, especially when it involves combining retirement savings, the Age Pension and other assets to create retirement income.

It is incumbent on the financial services industry to improve its retirement offerings with products, services and tools to better help Australians convert their hard-earned retirement savings into retirement income.

Have you investigated buying an annuity? Have you changed you mind about such products?

Stephen Huppert has had nearly 30 years’ experience in superannuation, wealth management and life insurance. He works as an independent consultant and adviser partnering with institutions big and small that are committed to improving the retirement outcomes of Australians.

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Disclaimer: All content in the Retirement Affordability Indexâ„¢ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

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Written by Stephen Huppert

8 Comments

Total Comments: 8
  1. 0
    0

    I have looked at annuity a few times. the only problem with anuity from what I can see, and would love to know if I am wrong, is that there is No money at the end of your life for the family. If i didn’t have kids, an annuity would be perfect for me as my grandmother lived to 105, and health wise, I am tracking like her, in fact she never exercised and I do.
    I think the best case scenario is to have a good fund that is making more money than you can spend. I have met retirees in that situation. And if you have 500K and are in a good fund then this is doable.

    • 0
      0

      Depending on your age you could be right but I do not think $500K would be enough for the 2 of us at 70 years of age. If you have a dwelling (house or apartment) it should be enough to leave the kids. My old country’s defined benefit fund is struggling because of no returns on investments.

    • 0
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      mariner, I am now single, and I expect my fund to earn on average 8% or more. It was earning about 13% before covid 19. I am 62, so potentially could live for anothr 40 years in retirement. Once I get the travel bug out of my system, I will need about $22 to $25k a year to live on.
      Even if my $$ whittles down to $300k(not likely), at 8% I can still live off that. And i would get some $$ from the AP as well. And still have $$ left for my estate. My home is in a retirement village, but I do own the land so it will increase in price but still have the retirement act rules covering it.
      I don’t plan on being the richest person in the cemetary. I have already bought a modest firesale unit for 1 daughter and gave $30k deposit to a niece so she could finally start owning a home. I would love to buy a unit for my other daughter but prices have now escaped me. the firesale unit I bought in 2016 was my Powerball moment in life. I doubt will ever be repeated.

    • 0
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      Congrats leek! You know what you are doing, but with the lotteries you might get another Powerball moment. I am in for Saturday lotto for 42 years, same numbers and still hoping.
      Joke aside, you planned well. Property at the moment is overrated for younger people and something has to give but what to do to fix the place up for younger people to buy in? Politicians please, give us a little idea.

    • 0
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      Mariner and Leek, if they have $500k, they are still relying on the government (taxpayers).
      If they had managed to save about $1.5 million extra, with dividends as they are today, they would find that they would be off the government handout but having to support
      themselves outright, probably on less income.

  2. 2
    0

    I find this question very easy actually. All one needs to do is to work out the future rate of inflation, divide the balance by the number of years until death and budget accordingly. Whoops, actuaries can’t give me a definite answer on inflation and my doctor thinks that I should live for a while longer, barring anything unforeseen so I’m back to square 1.

    My point is that none of us can really work out how to make our money last during the retirement years and this is the main reason that a high percentage of respondents to surveys will say they are worried about running out of money. Our super fund averages a higher return than the compulsory drawdown so, on paper, our super will never run out but what will the buying power be down the track, that’s the main concern.

    There’s not a lot of information about annuities to make a confident decision; are they for a term or do they run unto death, are they adjusted with the CPI which even if they do may not be enough given that the last CPI was negative although our spending shows quite clearly that a lot of essentials are costing more. We need to factor in home ownership or rental, a debt structure, if applicable, and future health needs. As can be seen there are too many variables to make a confident decision so, in our case, we’re staying with the Devil we know.

  3. 1
    0

    I converted my super to an annuity 13 years ago, at minimum rate without indexation. It has proved adequate when combined with age pension. Principal was down to about $125,000 at commencement of GFC. When the chance came to halve monthly drawdowns earlier this year, I took that option and am still happy with the choice. Principal having hit rock bottom early in this year, I’m pleased to say it has recovered several thousand dollars in the past few weeks.


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