If there is a recurring dream (read nightmare) for many older citizens, it is that the nest egg has been drained dry and there are still many more years of retirement living to come. Which leads too many retirees to lead an unnecessarily frugal life.
The YourLifeChoices 2021 Insights Survey, which drew more than 7000 responses, clearly shows older Australians’ fears about running out of money. Asked, ‘Do you believe your savings will provide an income for life’, 56.7 per cent of respondents said no.
It’s understandable that when a lifetime of money coming in is replaced by decades of money going out, the adjustment is difficult. The earn-spend-save cycle is replaced by the spend-spend-spend cycle – especially now when official interest rates are at record lows.
So what is the key to making the transition? Knowledge, which delivers confidence. The more we know, the better we understand, and the more prepared we will be.
You may not plan to retire until the Age Pension age (currently 66.5) but get comfortable with the numbers at least a decade before that.
Estimate your savings and super balance and familiarise yourself with the Age Pension rates and the income and assets tests that will determine that payment.
The Insights survey tells us that the bulk of respondents are happy to do just that. Asked, ‘What or whom helped/helps you most with your retirement planning’, the bulk of respondents (55 per cent) said, ‘I did it myself.’
The difficulties, for everyone, is longevity. No-one knows – or wants to know – how long they will live. But there are a number of sites that have free longevity calculators, including: mylongevity.com.au and the Optimum Pensions Lifespan Calculator. These will at least open your eyes about the probabilities.
2. Financial advice
If going it alone doesn’t appeal, get financial advice. The sector is going through a period of considerable change in the wake of the financial services royal commission, which should give you more confidence to head down that path.
Almost half of Insights survey respondents (46.4 per cent) said they had sought or would seek financial advice from an independent adviser or from their super fund. The back-up and specialised knowledge can help you spend with confidence.
Compare the fees charged by different advisers, decide what you want from the advice, make sure your adviser has an Australian Financial Services (AFS) licence or is an authorised representative. Check their qualifications on the Financial Advisers Register.
A financial adviser can help you with:
- retirement fund management
- mortgage advice
- tax help
- investment risk
- estate planning.
3. Be aware of the risks and plan for them
There’s a lot about the future we can’t predict, but that doesn’t mean we can’t put plans in place.
Is it too late to start an emergency fund? Do you have a household budget so you know what expenses are coming up each month or quarter? If you think you need guidance, there are free financial counselling services, such as at moneysmart.gov.au.
Health emergencies are difficult to plan for unless you have private health cover, but maintaining a healthy lifestyle is a good head start.
4. Adopt the ‘right’ kind of spending
Money gives security, but not necessarily happiness.
If you can shift your spending from ownership to experiences, spending your nest egg becomes fun and meaningful instead of a retirement fear.
It’s not about fast cars, it’s not even about big houses, it’s about experiences, connections and making memories. It’s about having the time to do the things we’ve always wanted to do, not buying all the stuff you always thought you wanted.
Thomas Gilovich, a psychology professor at Cornell University, has studied the question of money and happiness for more than two decades and says: “We buy things to make us happy, and we succeed. But only for a while.
“Our experiences are a bigger part of ourselves than our material goods. You can really like your material stuff. You can even think that part of your identity is connected to those things, but nonetheless, they remain separate from you. In contrast, your experiences really are part of you. We are the sum total of our experiences.”
5. Buy an annuity
A lifetime annuity is an insurance product that allows you to pay a lump sum for an annuity and in turn, receive a guaranteed income. That means peace of mind for many.
This additional layer of protection in retirement can give guaranteed income for life (regardless of how long you live). It can also help some retirees access more of the Age Pension as only 60 per cent of the income from an annuity is included in the income test for the pension.
According to research from retirement and wealth management experts David Blanchett and Michael Finke, choosing to buy an income annuity could give retirees a ‘licence to spend’ in retirement.
“An annuity can not only reduce the risk of an unknown lifespan, it can also allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg get smaller,” they say.
Talk with a financial adviser for a full understanding of annuities.
6. Home equity products
For homeowners, there are a number of products that can provide income by releasing equity in the home through a reverse mortgage. The government offering is the Pension Loans Scheme, which received a partial makeover in the most recent Federal Budget, but there are also several commercial offerings. Always read the fine print or seek financial advice, but these products – and even the knowledge that they exist – can allow you to spend with greater confidence.
7. Ease your way into retirement spending
Research from Age Wave and Merrill Lynch finds that it takes retirees about 18 months, on average, to start to feel comfortable about spending money. It’s not a race, settle in and enjoy the journey.
What has been your experience of spending in retirement? Do you have any tips or pointers to share? Why not share your suggestions in the comments section below?
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