How to Retire with Greater Confidence

For some Australians, retirement is everything they were promised. Indeed, those retiring today may be healthier than any comparable generation in history. Social researcher Bernard Salt calls ages 65-85, “The Great Contentment”.1

However, retirees and pre-retirees often face a wall of worries. In the earlier decades of our working lives, most Australians are focused on career, family and buying a home. Put simply, super isn’t a priority. Until it is.

Conquering the Fear of Running Out (FORO)

Many Australians worry about running out of money in retirement. After a lifetime of working and receiving a constant stream of income, the prospect of funding an enjoyable retirement from a single, soon-to-dwindle pile of money looms as a mathematical challenge and emotional rollercoaster.

This fear of running out is heightened when the growing cost of living eats away at your lifetime savings.

The international retirement income specialist Don Ezra points to two sources of worry when providing for life after full-time work: “One is that you don’t know how long you’ll live. The other is that you don’t know how large a return your financial capital will earn.”

Complexity and variables

In Australia, we may have the most complex retirement system in the world2 and this complexity seemingly increases with every election cycle. In addition to regulatory, longevity and return risk, retirees need to manage a complex tax code and a curvy Social Security system.

Also, everyone has a unique set of variables that impact their situation. Some retirees are ushered into retirement by illness or injury. Others have retirement strategies complicated by divorce and re-partnering. Or perhaps a couple retires at different ages and access the age pension at separate times.

And, of course, the duration of retirement is itself an unknown.

Too much banking on mum and dad?

For many retirees in property-obsessed Australia, decisions about the right level of retirement spending are complicated by the desire to leave a home (or at least a deposit) to their children. This can complicate the work of financial advisers, and the nation’s policy makers often question why savings are used to benefit the next generation, rather than underpin retirement lifestyles.

Trouble at home

Reverse mortgage schemes like the Government’s Home Equity Access Scheme are gaining popularity and provide a significant increase on age pension income. Yet many retirees will remain ‘asset rich and cash poor’ until they can monetise the capital sunk into their home without the risk, costs and potential bequest-reduction inherent in a debt-driven home equity solution.

Price pressures

The sudden re-emergence of inflation is exacerbating the challenges listed above.

This threat was made clear with the recent increase in the amount needed to enjoy ASFA’s ‘comfortable retirement standard’. In the March quarter of 2023, it hit a record high of $70,482 per year for couples. That’s up 7.7% for the year.3

Finding a solution

It’s up to financial institutions, advisers and policymakers to help pre-retirees, retirees and their families manage these challenges. Ultimately, we need to help you build a large enough nest egg so you can balance your retirement lifestyles with any sense of obligation to your family. After all, retirement should mean giving up work, not giving up your lifestyle.

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General Advice Warning: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

References:

1https://www.theaustralian.com.au/business/property/the-peak-time-of-our-lifeages-at-which-australians-pass-through-life-stages/news-story/c11a96ba0ec87 329cd08a2d91e378bc0

2 Good Practice Principles: Superannuation and retirement models, Jim Hennington, Actuaries Digital, April 2022

3 ASFA: Inflation drives the cost of retirement to a record high, ASFA Media Release, 26 May 2023

Original article: AMP (2024). How to retire with greater confidence. Financial Planning Newsletter – Autumn Edition 2024, p. 1-2.

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