Retirement is a time when individuals should be able to enjoy the fruits of their labour, relax, and experience financial security. However, for many Australians, the dream of a worry-free retirement is marred by a fundamental challenge - the difficulty in matching appropriate spending levels to their retirement assets. The Australian Superannuation system has inadvertently created an environment where retirees are often overly cautious, limiting their spending and, in some cases, leaving behind unutilized savings. In this article, we will delve into the reasons behind this phenomenon, how it affects retirees, and what potential solutions exist to address the issue.
Most Australians enter retirement with a lump sum of money they have accumulated through their working years. The task ahead is to make this money last throughout their retirement, which could span several decades. The challenge manifests due to uncertainty surrounding how much they should spend, how their spending patterns will change over time, and what returns they will receive on their investments.
A recent government review into retirement spending has shed light on the issue. It revealed that a considerable number of retirees put constraints on their spending, fearful they will run out. The study found that by 2060 one in three dollars withdrawn from superannuation will be passed on as an inheritance rather than being used for retirement income.
The problem is compounded by the historical focus of superannuation funds on their members during the accumulation phase. The primary objective of growing funds under management led to inadequate attention being paid to retirees' unique needs and concerns. This has resulted in insufficient guidance and support for retirees seeking strategies for effective spending during their retirement years.
Furthermore, there is a lack of incentive for superfunds to actively encourage retirement spending. Increased spending by retirees would decrease the funds managed by the superfunds, subsequently reducing the fees generated. As a result, many superfunds have been reluctant to prioritize retirement spending strategies for their members.
Recognizing the severity of the issue, the government mandated that superfunds assist members in devising retirement spending strategies. However, it appears that the majority of superfunds have been slow to act upon this legal obligation. The Australian Prudential Regulation Authority (APRA), discovered that most superfunds had taken little or no action to address this critical aspect of retirement planning.
While the system faces significant challenges, retirees can take control of their financial future by seeking financial advice and creating a comprehensive spending plan. The purpose of this spending plan is to align a client's financial resources and goals with a suitable level of spending. By doing so, retirees can strike a balance between enjoying their early retirement years and ensuring they have sufficient savings to sustain them throughout their entire retirement journey.
This blog contains general and factual information and does not take into account anyone's individual objectives, financial situation, needs or tax circumstances. We strongly recommend you contact one of our Advisers if you would like personal advice.
Redpoint Investment Holdings Pty Ltd (trading as CY Financial Advice), is a corporate authorised representative (No. 378099) of CY Financial Services (AFSL No. 509648)