Retirement income isn’t just about income

To quote Tennessee Williams, “You can be young without money, but you can’t be old without it.” While Williams may never have had to worry about mundane things like the stresses of sustaining a life in retirement or on the Aged Pension, the rest of us who don’t revel in worldwide fame will need to build some savings.    

And, even so, while having savings for retirement is extremely important, generating income in retirement is arguably more important. 

So, how much income is needed to retire? What are the tools needed to generate income in retirement? And, how do those in the pre-retirement phase make sure they’re on track to cater to their individual retirement needs? 

What are the industry recommendations?

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Looking at the Association of Superannuation Funds’ (ASFA’s) retirement standards, retirees can aspire to two different lifestyles: modest and comfortable.  

For a single person aged around 65, the modest budget allows for $27,425 spending per year, while the couples budget allows for $39,442. 

The modest budget is a little above the Aged Pension level, and Ross Clare, director of ASFA’s research and resource centre, said “there’s a lot to be modest about”. 

For those wanting to live a little more of the luxury life, the comfortable budget allows for a single person to spend $42,953 per year, and a couple may spend $60,604 per year. 

When the retiree hits 85, the modest budget for a single person drops to $25,927, and a couple to $37,004, while the comfortable budget drops to $40,798 and $56,548 for a single person and couple, respectively. 

“When we surveyed the population, many people aspire to achieve ‘ASFA comfortable,’” says Clare. “It resonates with people as looking like a sensible standard of living for retirement. But it doesn’t suit everyone – we’ve had some funds who have members in the upper income level range who find it a little bit limiting.”

While income is entirely dependant on what standard of living one aspires to, and what their wants and needs are, Clare says the recommendations are a “good benchmark” for people when considering their retirement plans. 

Clare points out that, given the Aged Pension does most of the heavy lifting, the modest standard was a pretty easy target to hit but, by comparison, only 20 per cent of retirees were at the comfortable standard.

But stats show that, overall, a lot of Australians aren’t getting the income they need for retirement, with women in particular suffering as a result of breaks in paid work. 

Clare expects the super guarantee increase from 9.5 per cent to 12 per cent will lift an extra 30 per cent of retirees into the comfortable level.

“That will be a major achievement for the compulsory system, but equally 50 per cent of retirees won’t be at that level, and I think there’s still some work to be done in getting people to think about what they want in retirement, and what they need to get to the standard of living in retirement they want.”

Senior analyst at Investment Trends, King Loong Choi, pointed to a lack of understanding among pre-retirees as to what’s expected in terms of retirement income, rather than a lack of knowing what they want. 

For example, the Investment Trends Retirement Income report found that pre-retirees think they need almost $500,000 to retire, but actual retirees report they’ve retired with just $300,000. 

As well, pre-retirees think they’ll get an average monthly income of $2,800, but need $3,300 to retire, while actual retirees report they’ve lived on $2,200 per month. 

“What this starts to highlight is that when it comes to the topic of retirement, there typically is a general mismatch, or a misconception particularly among those who haven’t yet retired, about how much they need for retirement,” says Choi. 

Never depend on single income 

The great Warren Buffett prophesised that one could never depend on single income, and one should make investment to create a second source. And he would be right in saying that. 

Before retirement, Challenger’s head of technical services, Andrew Lowe, says there are numerous strategies clients can use to build the assets they’ll have to fund income in retirement. 

Among the strategies were concessional and non-concessional super contributions, and where a client has savings capacity, voluntary contributions by way of salary sacrifice are a good way to boost savings. 

Lowe points to further flexibility for concessional contributions that has, since 1 July this year, become available to clients to allow those with a total super balance of less than $500,000 to carry forward “unused” contributions on a rolling five-year basis to be used in future years. 

“This ‘catch-up’ measure will allow eligible clients to more easily build their retirement savings when cash flow allows,” he says. 

Nathan Zahm, senior investment strategist in Vanguard’s Investment Strategy Group, says another strategy is simply to work a little longer.

And, while that’s a tough trade-off, and often not entirely possible, Zahm says working an extra year is a useful tool to keep saving and postpone spending down on super. 

After retirement, the right investments and adequate planning look like the top way to build and generate income.

Director of superannuation, retirement and investments at AMP, Rod Finch, also drives home the point that finding the right investment strategy that aligns to the customer’s goals is extremely important. 

He highlights that certain tools like AMP’s Retirement Modelling Tool can help advisers build retirement income strategies that incorporate a client’s risk profile along with their goals. 

These goals, Finch said, include the essential income needed for day-to-day expenses, income to help fund lifestyle goals for things like travelling or pursuing a passion in retirement or income for a legacy bucket to help leave an inheritance for the retiree’s family. 

Finch said platforms were a good way for clients to build retirement savings through super and investment to provide income in retirement. 

“Using a platform to access different investment structures can help clients easily transfer to a pension product when they’re ready to retire,” he said. “In addition, budgeting tools ... can also help customers achieve day-to-day savings needed to support goals by helping them watch their spending.”

Finch added that clients and their family members could benefit from features like fee aggregation and fee capping to access a sophisticated product solution at a competitive and flexible price.

“Advisers can also look to a combination of allocation pension, annuity, or a guarantee to help their clients in retirement,” he said.

Zahm agreed that products like the Aged Pension would carry a retiree’s basic living standards, and added that it generally acts a backstop for those who might lose wealth due to market performance, high spending or a life event that depletes assets.

For those that have a high risk-aversion though, and want protection against longevity and a guaranteed income, Zahm also says products like annuities also sit in the basic living expenses category. 

For other goals, Zahm says investments like stocks, bonds and cash were the primary drivers.

“For contingency reserve and legacy, you tend to need liquidity,” says Zahm. “You tend to need assets to the money and growth in the case of legacy – so those tend to be more oriented around the portfolio.”

Zahm says products that add diversification from each other, like mixing high-quality bonds and stocks from a defensive and growth perspective, was key as opposed to what retirees tend to do, which is overweight high-dividend equity securities or bonds with higher interest payments, or form term deposits simply for the yield.

“The problem with this is, any one of those elements tends to either add risk to the portfolio, or reduce its expected return, or sometimes both, and really what we want them to focus on is that total return mindset – that capital gains, plus interest, plus appreciation – those are going to be the elements that, combined together give you your total return,” he says.

It wasn’t raining when Noah built the ark

Noah’s ark was built when clouds were few and far between, and the experts think pre-retirees could learn a lesson or two about retirement planning from the fables of the Old Testament.

When it comes to preparing for retirement, the consensus among the experts is that early intervention and aid from an adviser will make a significant impact on retirement income.

Choi says only 42 per cent of pre-retirees feel they are well-informed about what they actually need for retirement, and only one-third feel they could reach their retirement goals without any advice. 

“That’s two-thirds of those that haven’t reached retirement yet, that are unsure or do not feel they can reach retirement without any professional help,” he says. 

According to the Investment Trends Retirement Planning report, the majority of pre-retirees will look to a financial planner for that professional help, and they generally seek access to advice, access to a longevity protection product, and access to a product that can guarantee income for the rest of their life in retirement. 

Vanguard’s Zahm also drives home that planning and seeking an adviser before retirement was key. 

“You can’t be prepared enough for retirement,” he warns. “In those last ten years before somebody exits the workforce and enters retirement, there’s a lot of sensitivity during that time period, and there’s a lot of tax preparation that individuals will have to go through.”

While advisers can help with simplifying things like tax and super contributions, Zahm says simply helping pre-retirees budget for retirement is invaluable.

“For many retirees, thinking through what their finances will look like in retirement is very hard because they’re not actually in retirement yet,” he says. “But advisers who have seen others go through that retirement process, they’re going to have the expertise to really help someone [who is in that pre-retirement phase and about to retire] understand what that’s going to look like.”

ASFA reports the average superannuation balance for women is $138,000 to $150,000, compared to $292,500 for men, which can be attributed to career breaks, gender pay gaps and longer life expectancies for women. 

BT Financial Group’s senior adviser, Diana Saad, says strategies for women in retirement weren’t that different from those of men, but women particularly should be more confident in seeking a professional advice and asking questions. 

Saad says women should also look to strategies that support funding for a longer retirement and factoring in longevity risks along with increasing their financial literacy. 

Saad says it was important for women with low super balances not to be discouraged, but to look to methods like concessional super contributions, salary sacrifice, downsizer contributions (if they were to sell their home) and spousal contributions to bulk up their savings.

“There’s no one silver bullet, but there are a number of strategies that a financial adviser can help bring to life to help women achieve their goals,” she says. 

Saad says women should “project forward” by looking at their finances and their retirement strategies and seeing what the financial outcome will be, and whether their funds will last their retirement. 

“If it won’t last, [women should] look at what else can be done or what trade-offs need to be made.”

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