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In many ways, retirement is a step into the unknown. After decades of working and accumulating savings, it can be difficult making the shift to drawing on those savings to support our retirement lifestyle.
So it’s not surprising that misconceptions and misunderstandings about our retirement income system are common.
This was one of the key findings of the government’s Retirement Income Review, which canvassed the views of a wide range of Australians expressed via surveys, submissions and the media.
Here at SuperGuide, we aim to bring you the information you need to make important decisions about your superannuation and retirement planning more generally.
Below is a summary of some common retirement myths identified by the Review and others, and why they don’t stack up.
Adequacy of retirement income and estimates of retirement expenditure needs
Myth #1: You need to preserve your assets in case you get sick or need aged care, and Myth #2: You will need to pay for most of your health costs in retirement.
Health and aged care are heavily subsidised in Australia, so every retiree who needs care will receive it.
According to the Review: “While health spending increases as a proportion of overall expenditure for people between ages 55and 80, it remains a relatively small share of total expenses in retirement. This is largely due to public expenditure on health absorbing much of the cost of ageing. The same applies for the cost of aged care services.
The ASFA Retirement Standard estimates a couple aged 65–84 aiming for a ‘comfortable’ lifestyle can expect total health spending of around $204 per week out of total weekly expenditure of $1,303. Older retiree couples aged 85-plus can expect to spend slightly more on health services ($242 per week) but less overall ($1,192) as they wind back spending on things like eating out, entertainment and holidays.
While Medicare provides a safety net for all Australians, retirees receive extra support. Once you reach Age Pension age (even if you don’t receive any Age Pension), you become eligible for concession cards that give you access to cheap medicines and other healthcare benefits. While aged care costs (and standards) can vary enormously, they are means tested so no Australian who needs care will miss out.
Myth #3: You need $1 million in superannuation for an adequate retirement income.
Every retiree’s circumstances and lifestyle aspirations will be different. But as a general guide, ASFA’s Retirement Standard estimates that a single person needs a lump sum of $545,000 to lead a comfortable lifestyle in retirement, while a couple needs $640,000. These sums would provide annual income of $68,014 for couples and $48,266 for singles. These figures are for the September quarter 2022 and assume retirees are aged 65–84, own their own home, draw down all their capital and receive a part Age Pension. Older retirees generally spend a little less overall as they wind back their activities.
Rather than picking a round number like $1 million out of a hat, you need to work out how much money you need to save to support your version of a fulfilling retirement.
Retirement income products and investment strategies
Myth #4: The best investment strategy in retirement is very low risk, such as cash.
While cash in the bank is capital-guaranteed by the government, that doesn’t mean it’s without risk. As returns for cash are generally lower than returns for other asset classes, one of the biggest risks is parking all your savings in the bank.
The average annual return for cash in the 10 years to December 2022, a period of historically low interest rates, was below 2%; not enough to keep pace with inflation of 2.6% over the same period and well below the minimum drawdown amounts from super pensions. In other words, having all your retirement savings in cash is a sure fire way to eat through your capital.
The best way to reduce risk is to invest in a diversified portfolio of assets. For example, the median superannuation Growth fund (61–80% growth assets) returned 7.6% per year on average over the past decade. Way better than cash in the bank.
Myth #5: Investing in real estate is a better investment strategy for retirement.
Some debates never die, like: Which is better, shares or property? Some general observations first.
In retirement, unless you’re on the full Age Pension, you will rely on income from your investments plus the drawdown of capital as your nest egg depletes. While direct investment in residential property has traditionally produced good returns for investors, it lacks liquidity and diversification. That is, while it offers rental income, you can’t just sell off a bedroom when you need extra funds. And unless you own properties scattered around the country, you run the risk of a local market downturn or one bad tenant trashing your retirement savings.
When it comes to actual returns, it’s difficult to compare like with like because your returns will depend on the properties you select, the tax structure you hold them in and the time period observed.
Alternatively, listed property provides access to a professionally managed, diversified portfolio of property investments.
Shares and property are both growth assets with the potential to provide capital growth and income from dividends (shares) and rent (property). While returns are generally higher than returns from cash and bonds, so are the risks of short-term losses.
According to Vanguard, Australian shares provided an average total return of 9.4% per year in the 10 years to June 2022, while total returns from Australian listed property averaged 9.2% over the same period. Over 20 years, average annual returns were 8.2% and 5.4% respectively. Over 30 years, average annual returns were 9% for shares and 7.6% for property.
By comparison, the median superannuation Growth fund returned around 7.9% per year in the 30 years to June 2022, comfortably ahead of inflation after fees and taxes and similar to the long-term return from property, with considerably less risk. Growth funds contain a mix of growth and defensive assets to protect you against the risk of short-term losses in a single investment or asset class. They also provide you with a smoother ride along the way than a dependence on property alone.
Myth #6: The Age Pension is earned during working life. Taxpayers ‘pre-pay’ for it through their taxes.
The Age Pension is a means-tested payment for older Australians. According to the Retirement Income Review, it’s not based on past income or contributions, or taxes paid during a person’s working life. Instead, the purpose of the Age Pension when it was introduced in 1909 was to provide a safety net for those most in need.
The Age Pension continues to be the main source of income for people who were low- to middle-income earners during their working lives, supplemented by super and other investments. More than 70% of people aged 65 and over currently receive the Age Pension, with over 60% of those at the full rate.
To be eligible you must reach Age Pension age (currently 66 and six months but rising to 67 in 2024), pass both an income test and assets test, and meet residency requirements.
Myth #7: The Age Pension will become unaffordable. Most people in future won’t receive it.
On the contrary, as our compulsory superannuation system matures (compulsory super was only introduced in 1992), Australians will have higher super retirement balances and be less reliant on the Age Pension.
According to the Retirement Income Review, government expenditure on the Age Pension is projected to fall from around 2.5% of GDP today to 2.3% in 2060. The proportion of people over Age Pension age receiving the pension is projected to fall from around 71% today to 62% in 2060. At the same time, part-pensioners (as a percentage of all Age Pensioners) are projected to increase from 38% to 63% in 2060.
The only fly in the ointment is the growing cost of super tax concessions. These are expected to grow as a proportion of GDP, exceeding the cost of the Age Pension by 2050. If there is a threat to the sustainability of our retirement income system, it’s the high cost of super tax concessions to mostly wealthier retirees.
Myth #8: The minimum drawdown rate is what the government recommends.
Absolutely not. The government mandates a minimum amount that retirees must withdraw from a superannuation pension, but there’s nothing stopping you withdrawing more if you wish.
The minimum drawdown rates start at 4% for retirees aged under 65, rising incrementally to 14% for those aged 95 or more. (These rates have been halved temporarily for the 2019–20 through to 2022–23 financial years due to the impact of COVID-19 on financial markets.) The initial 4% rate was based on research projecting that it should preserve the average retiree’s nest egg until age 90 with a high degree of safety.
Myth #9: If you withdraw your money from superannuation, you must spend it.
What you do with money you withdraw from super is entirely up to you. You can spend it, put it in the bank for a rainy day or invest it outside super. You can even recontribute it into super up until you turn 75.
Just be aware that money you don’t spend will continue to count towards the Age Pension assets and income tests, whereas spending your super may increase your Age Pension entitlements.
Myth #10: You should only draw down the income earned on your assets – not the capital.
It is understandable that retirees want to preserve their capital. None of us knows how long we will live or what our circumstances might be later in life. In practice though, for all but the very wealthy, preserving capital at all costs generally results in retirees living more frugally than necessary.
According to the Retirement Income Review, most people die with the bulk of the wealth they had at retirement intact. Which is great news for your beneficiaries, but a missed opportunity for you to live life to the full, especially in the early years of retirement when you are fit and active.
As explained in Myth #8, minimum pension drawdown rates are designed to preserve the average retiree’s super nest egg until age 90, assuming you gradually draw down your capital as well as income. If you don’t relish the idea of living on the Age Pension if you live into your 90s, you might consider investing some of your retirement savings in an annuity. These retirement income products typically kick in at an age when your other savings may be running low and pay an income for the rest of your life.
The elephant in the room in terms of augmenting your retirement income is the family home. Most retirement planning advice and tools to project retirement income are predicated on retirees owning their own home. Yet cash-poor retirees often end up feeling trapped in a home they feel is too large and difficult to maintain.
The Review pointed to the family home as “an underutilised source to support living standards in retirement”. Governments have also twigged to this and are increasingly aligning retirement and superannuation policy with measures to unlock the store of wealth in the family home.
Most retirees want to continue living in their home for as long as possible, but there are ways to access some of the equity in your home to boost your retirement income and still have an asset to leave to your children. For example, you could downsize to a smaller home and contribute some of the proceeds to your super or take advantage of the government’s Home Equity Access Scheme (formerly the Pension Loans Scheme).
The key to making the most of your retirement savings is to know how our retirement income system works combined with a personal retirement plan. Because of the complexity of the system, you might consider getting independent financial advice tailored to your personal circumstances and preferences.