Q. What is most retirees’ biggest worry?
A. Running out of money.
Q. What is one of their main objectives?
A. Leaving an inheritance.
Combine those two elements and there’s a big problem say economists – retirees are not spending enough in retirement.
A whopping 71.3 per cent of the 6145 respondents in the YourLifeChoices 2022 Insights Survey said leaving an inheritance was a priority and 72.5 per said that would not prevent them from funding a more comfortable retirement. But … 59.3 per cent said they did not believe their savings would provide an income for life.
That equates to spending hesitancy, and that is bad for the economy apparently.
Financial Services Council (FSC) chief executive Blake Briggs says research delivered by NMG Consulting demonstrates that retirees are drawing down 17 per cent less income from their superannuation than what is ‘optimal’.
He says that in the next decade, when three million Australians start drawing down their collective $1.5 trillion in super savings (from the $3.4 trillion pot), weaknesses in the design of our otherwise world-leading retirement system will be exposed. And retiree living standards will suffer as a result.
Writing in The Australian, Mr Briggs says: “… without reform to ensure that superannuation operates as efficiently as possible to raise retirees’ living standards, the system will continue to be targeted by vested interests arguing for higher taxes on retirement savings.”
A solution, he says, is to increase mandated retiree drawdown amounts by 10 per cent each year. That way, aggregate income paid to retirees would be increased by $397 billion by 2050 and total superannuation assets would be 12 per cent lower by 2060.
That strategy would, however, halve the amount of super left as bequests by 2060, dashing one of retirees’ key objectives.
Mr Briggs says FSC has used the research to develop a road map with three objectives:
- Encouraging innovative, new retirement income products to come to market, including a disclosure framework to allow consumers to compare retirement income products and a simplified process to modernise legacy products
- Helping consumers see and use superannuation as primarily for spending during retirement, including making financial advice more affordable and amending disclosure rules to have a drawdown focus
- Helping consumers take control of their superannuation by simplifying how it interacts with other parts of the retirement system, including the Age Pension, aged care and healthcare.
Mr Briggs says: “Australians work hard over their working lives to save for their own retirement, and we owe it to them to deliver policy settings that give them the confidence to enjoy the highest standard of living in retirement.”
Sound the applause. But there’s a significant hitch, you say, that only a crystal ball can solve – how long will you live?
These responses are typical of retiree views on the FSC proposal:
“Yes, super should be spent during retirement and not bequeathed. Fundamental and insoluble problem though … will I live another five years or 30 years? Prudence suggests the latter needs to be planned for, which means it’s inevitable on average that plenty of capital will remain unspent.”
“Reasons I am not spending more of my super (age 75): 1. I may live to 100 though I hope not. 2. Unknown future liability for care bills for myself and my wife. 3. Increasing medical bills. 4. My children will not have adequate means for their own retirement from their meagre defined contribution super, and will need anything I can leave them.”
The government’s Retirement Income Covenant, which came into effect in July 2022, was developed to “support retirees to have the confidence to spend their hard-earned savings, while enabling choice and competition in the retirement phase of superannuation”.
While there have been some new products from super funds, the problem remains – spending hesitancy due to the unanswerable question of longevity.
If you’re retired, are you spending enough to live the retirement you want? Or are you being cautious because you don’t know how long you will live? Share your thoughts in the comments section below.
Also read: Five facts everyone needs to know about life expectancy