Spotlight on your retirement income
How prepared are you to make the many vital decisions facing a retiree ......
..... about how to make the most of your savings to provide an income for the rest of your life?
It is worthwhile carefully considering this question even years before the date of your intended retirement.
Your response to the question may influence not only how you structure your affairs during your eventual retirement but also on how you save for retirement.
Particularly given the ageing of the population, greater longevity and generally inadequate retirement savings, the issue of retirement income is becoming increasing critical for Government, super funds and, of course, individuals.
The recent release of the interim report of the Murray Financial System Inquiry shines another spotlight on the provision of retirement incomes.
As the interim report comments: "Retirees make critical, once-in-a-lifetime decisions regarding when and how to draw down their savings over the remainder of their lives and how to manage the investment, inflation and longevity risks involved."
And the report telling adds: "Many retirees are unprepared for these decisions."
The report makes the point that during the accumulation or saving phase, employers make compulsory contributions for employees, with a default fund system in place for those who are less engaged with their super. "This framework ceases at retirement... The retirement phase of superannuation is underdeveloped and does not meet the risk management needs of many retirees."
Michael Rice, chief executive of Rice Warner Actuaries, has written a thoughtful opinion piece giving his view that the Murray inquiry's emphasis on retirement incomes is well placed.
"There is relative urgency here," Rice writes. And he points to estimates by his consultancy that the numbers of male retirees who draw a superannuation pension will more than double from 950,000 to over two million over the next 15 years. Over the same time, the number of female retirees will rise from 981,000 to 2.3 million – an even higher annual growth rate.
Further, Rice Warner projects that superannuation assets backing the payment of super pensions will grow from 30 per cent of total assets in super to 39 per cent over the next 15 years.
"The dilemma for superannuation funds is the considerable uncertainty faced by their members," Rice says. "Such people will understandably be worried about how long their money will last."
Matters of concern to retirees in regard to their retirement income include longevity uncertainty, asset liquidity, expenditure patterns in later life and the financing of aged care.
"Yes, there has been some product innovation in this space but nothing exists that addresses all the needs of members," Rice stresses. "[But] products can only form part of a holistic solution…"
Other considerations for super funds include engagement of members with their super, education and advice, he says.
Hopefully, the growing public attention being given to Australia's retirement income needs will encourage more individuals to focus on the state of their own retirement savings and on how to achieve their intended incomes in retirement.
The provision of retirement incomes is an issue for Government, super funds, financial planners and, most importantly, individuals.
By Robin Bowerman
Principal & Head of Retail, Vanguard Investments Australia
5th August 2014