Retirement marks a profound shift in life. The cessation of employment can be both liberating and challenging, not least having to grapple with the corresponding end to the regular ‘pay cheque’ and the comfort of knowing there’s money coming in each month. Some new retirees go all out to live their best life and worry about the rest later…others start to worry about making their savings last from the moment they retire.
In a perfect world, retirees would enjoy their chosen lifestyle with the confidence that their retirement savings will last the distance. Unfortunately, reality paints a different picture. Retirement arrives and necessitates a reconfiguration of financial strategies and budgets. Retirees must adjust to a new level of income.
As freshly minted retirees grapple with the notion of having to eke out their retirement savings for an unknown period of time, they also find themselves disentangled from the structured routine that once defined their days. No more attending a place of work, camaraderie with colleagues or the feeling of satisfaction that arises from an achievement or job well done. This, combined with the absence of a steady income, can lead to anxiety, depression and other health problems.
Retirement income, past and present
Super is only one part of a retirement income plan; in reality, most people will be supported by other sources of income such as the Age Pension or income from other investments such as shares, property or term deposits.
The current range of super-based retirement income strategies is limited. The options generally don’t fully address the financial fears held by retirees, not least the fear of outliving their retirement savings.
At one end of the spectrum, Account Based Pensions alone provide flexibility, but can leave retirees shouldering significant investment risk, especially when used in isolation. At the other end, traditional lifetime Annuities are poorly understood and generally perceived as an expensive and inflexible solution. The Age Pension, designed as a safety net, barely provides enough income to sustain a subsistence level retirement.
Some people will have savings outside of superannuation that can be drawn on during retirement. Australian equities are popular for the dividend income and franking credits, while residential or commercial investment properties, as well as term deposits, are common sources of income.
Looking forward
Traditional retirement income products involve tough trade-offs between income certainty and flexibility and are often subject to unpalatable limits as to how one can invest, withdraw or use their money.
As life expectancies increase and living costs rise, the strategies and tools currently available are becoming less effective in managing the growing risks. With the retirements of 4.2 million plus Australians [1] at stake, new and innovative income solutions are urgently needed to complement the industry’s existing products and strategies.
Access to capital is also important. There’s a myriad of issues that could interrupt the best laid retirement plans. Illness, accident or an unexpected redundancy can all lead to an unplanned early retirement and throw those carefully crafted plans into disarray. Similarly, retirement can be interrupted by unexpected health issues, some of which might require access to money over and above the retirement ‘pay cheque.’
Retirees need diversified, reliable sources of retirement income, income certainty and access to capital. How well can the incumbent strategies meet these needs and what new solutions are available to provide income certainty and access to capital throughout retirement?
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