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Why many retirees are underspending


When it comes to life in retirement, many Australians are probably being more frugal than they need to be. And that’s largely built around a fear of running out of their retirement savings before they die – an outcome that’s known as longevity risk. Giving people the confidence to spend more of their accumulated savings in retirement is likely to remain a challenge for individuals over time, and for Federal Governments in terms of how much budget funding to allocate towards the Age Pension. The just-released Intergenerational Report 2023 discusses longevity risk in detail, projecting that average life expectancies will continue to rise over time, reaching 87.0 years for men and 89.5 years for women by 2062-63. Meanwhile, it projects that the proportion of people with accounts in the retirement phase, from which they are drawing a superannuation pension, will increase from 8% currently to 19% over the next 40 years.

“Longevity risk – the risk of outliving savings – is a key concern for retirees in deciding how to draw down their superannuation, consequently, most retirees draw down at the legislated minimum drawdown rates,” the report notes.

“This results in many retirees leaving a significant proportion of their balance unspent, for example, a single retiree drawing down at the minimum rates would be expected to still have a quarter of their retirement assets at death.”

The 2020 Retirement Income Review included projections from Treasury that outstanding superannuation death benefits could increase from around $17 billion in 2019 to just under $130 billion in 2059, assuming there’s no change in how retirees draw down their superannuation balances.

How much is enough?

Retirees continue to face significant cost pressures on their household budgets due to historically high consumer price inflation. The Association of Superannuation Funds Australia(ASFA) recently reported that the annual expenditure needed to reach ASFA’s comfortable retirement standard had hit a record high in the June quarter of $70,806 per year for couples, and $50,207 for singles. The expenditure needed to reach ASFA’s modest retirement standard was $45,947 for couples and $31,867 for singles. Vanguard’s recently released How Australia Retires study of over 1,800 working and retired Australians, released in May 2023, found that broad uncertainty over how much money will be enough to fund one’s retirement is a key factor in overall retirement confidence.

“Most people rely on the Government for protection against longevity risk through the Age Pension, which provides a safety net for retirees who outlive their savings,” according to the Intergenerational Report 2023.

“Well-designed superannuation retirement products can assist retirees to make decisions to help smooth consumption over retirement – aligning income needs with expenditure needs – and draw down on their balances efficiently. This would also enable decision making early in retirement.”

Planning and retirement confidence

Vanguard’s How Australia Retires research has found that having high retirement confidence is not dependent on age or income, but rather on having a plan.

More than half (52%) of the people we surveyed who presented themselves as being highly confident about their retirement readiness feel that they know what they need to do to achieve the retirement outcome they desire and are optimistic about this phase of their life.

They are relatively likely to use budgets and prioritise their savings. Of the people participants who received professional financial advice, 44% indicated they were extremely or very confident in funding their retirement.

And, of the Australians who have never sought any professional advice, only 25% indicated they were extremely or very confident in being able to fund their retirement. Furthermore, those who had not sought professional advice or sought only the assistance of family and friends tended to have less comprehensive retirement plans.

The recent thematic review of the retirement income covenant by the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC) into how super trustees are helping members enhance retirement outcomes concluded that more needs to be done to improve superannuation member outcomes in retirement.

“There is evidence that a high proportion of the superannuation benefits of many members in the Australian community remain unspent over the retirement phase,” the review found. “This suggests the Australian community needs assistance to use their superannuation benefits for retirement income.”

The Federal Government is expected to issue a discussion paper in the coming weeks that will focus on retirement income strategies and financial advice.
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