There is no shortage of opinion on what Australian retirees need, want and think. And those who are making the transition from full-time work to retirement are also often accused of lacking engagement with the financial process.
This is evidenced by high rates of failure to open superannuation statements, low financial literacy and a widespread inability to define key concepts such as preservation age and account-based pensions.
So it helps when someone asks retirees themselves if they think they are on track for a well-funded later life. Newly released insights into the seven main income ‘pain points’ of retirees provide a clear view of where they want more support and guidance. The data is based on a Retirement Readiness Checklist survey, conducted by independent advice organisation Retirement Essentials.
Here’s what more than 3000 respondents say are their most pressing issues as they move from work to retirement, and some information to help put your mind at ease.
1. Concern about running out of money. This remains the greatest worry retirees hold. Yet, it’s not a well-founded fear, as the age pension will be a safety net for about 65 per cent of retirees as they reach the qualifying age of 67, and by the time they are in their 80s, about 80 per cent of retirees will be receiving at least a part-pension payment.
The underlying fear might instead be one of needing to live on less than is needed to maintain your current lifestyle. What this fear may really reveal is the need for a clear financial forecast.
2. How does the age pension work – and combine with super? This concern, however, is well-founded. To put it mildly, the rules around pension entitlements are complex.
But when you try to calculate how your super savings might layer over the top of any pension entitlements, you’ll need a clear idea of the way the income and assets tests are applied – including what counts as a financial asset and what is exempt.
Then you will need to understand how assets are deemed to earn income. That’s why it’s critical to touch base with someone who knows the rules well, such as an adviser or support person at your super fund.
3. Starting an income stream and how it is taxed. It’s unsurprising that this pain point is ranked equally with the above because working knowledge of how super is taxed is essential as you transition from full-time work.
Put simply, when your super is in savings (accumulation) mode, it is generally taxed at 15 per cent. Once you turn 60 (and provided you meet all conditions), you can move to spending (decumulation) mode and this means that funds will not be taxed.
But there are many caveats on these simple rules, so it’s best to check with a professional.
4. Estate planning. The generation funding the bank of mum and dad is nowhere near as selfish as some commentary suggests. This is evidenced by so many older Australians who are ‘giving while living’ in the form of educational support and significant contributions to home deposits for their adult children.
Given the size of many Australians’ super savings they want their bequests to land in the right hands, so taking advice on the making of a will, choosing beneficiaries and ensuring these beneficiary nominations are legally in place is an important consideration.
5. Lifetime and financial goals and safe spending needs. For many retirees, this is a ‘how long is a piece of string’ question – but it shouldn’t be. Setting retirement goals can be a really uplifting exercise.
It’s really a question of which aspects of your life you’d like to continue (good health, family catchups, perhaps some travel and hobbies) and which you no longer wish to pursue. Goals help us focus on the fundamentals of our existence.
With an understanding of how you plan to spend your time, it becomes much easier to project how much this lifestyle might cost. With this actual number (annual household expenditure) in mind, you can then better understand the way your savings and any entitlements can combine to create a sustainable retirement income.
6. Optimising super contributions. The rules on how much super you can contribute can change until you are 75. So this is not just a challenge for those still working full-time – it’s also important for people working part-time, or not at all, particularly when it comes to life events such as receiving an inheritance or downsizing.
This means it’s necessary to understand the caps for your age and stage for both concessional and non-concessional contributions and special allowances such as carry-forward and bring-forward rules. Within these rules, there are a multitude of ways to enhance your super savings.
7. Making the right investment choice. Many people are unaware that they are active investors. That’s because they often think that they just receive an age pension and draw down some super and that’s it.
Because they have no other investments they might assume that making the correct investment choice is fairly irrelevant. But as older Australians have now benefited from the introduction of super since 1992, these savings are still investments.
Acquainting yourself with how your super is invested is important (and you can do this by checking your account online). Even more importantly, it will help to understand your own risk profile – how much risk you can tolerate and still sleep at night.
Understanding this profile can help you choose the best settings for your own specific needs.
