A recent research report has revealed that Australians have high expectations of their retired standards of living, but aren't sure these expectations will be adequately met with current levels of savings. Under-performance was not found to be a key issue raised, but more so changing legislation and a pervasive risk aversion that is crippling some accounts.
The Australian Retirement Vision Survey white paper was conducted by State Street Global Advisors with Rice Warner, and asked 1,200 superannuation fund and self-managed super fund investors about their financial plans and expectations for retirement.
Key findings include:
- Three out of five respondents expect to have the same standard of living post-retirement, with the median income required sitting at $982 weekly. The Association of Superannuation Funds of Australia (ASFA) Retirement Standard is $443 weekly for a ‘modest’ lifestyle, and $767 weekly for a ‘comfortable’ lifestyle.
- A fifth, however, aren’t confident that this can be achieved, with and without their super. Over half of those surveyed have no plans or objectives for retirement, with 44 per cent having clear goals.
- A major concern for investors is changing superannuation legislation.
- Most investors don’t plan to draw down their super as a lump sum to pay off debt (18 per cent). The remaining 80 per cent intend to convert all or part of their super into an income stream (allocated pension or annuity).
- Under half of those surveyed indicated they would be willing to take on moderate investment risks, which in turn impacts their ability to reach long-term goals.
- Those who believe financial advice matters in reaching retirement goals weren’t always following through: half were receiving advice, and a quarter were unadvised.
- Women need financial advice to close the gender super gap as much as possible – women are more conservative and risk averse, making already-low balances even lower, increasing the gap.
Funding old-age adventures
Policy-makers and industry are in the midst of finding creative solutions for people who expect more from their old age than previous generations have ever been afforded the luxury. We are enjoying ourselves for many more years than ever before, so paying for all this frivolity and adventure - and the bills - must be seriously considered, but as the survey reveals, most of the time it is not being thought out properly. What many Australians are looking down the barrel of is reaching their nineties with no cash, which is a frightening concept at best, and a devastating way to exit at worst.
This report (and others, repeatedly) reveals that the superannuation system for many Australians is proving simply baffling, with the underlying assumption that ‘she’ll be right mate’ that really doesn’t translate at all into a comfortable – or even very fun – retirement. The urban legends of poor old people eating cat food may be just that – myth – but what people don’t consider carefully enough is that being very poor and reliant on the age pension and/or the generosity of family in their old age means a lack of control over what you choose to eat, drink, and do in your spare time, of which there will be a lot. Reality doesn't seem to occur to many people, and this white paper demonstrates this astutely.
Australians, in their financial apathy, have the misguided idea that the government will take care of them, and while this may gently be true (you won’t starve), that isn’t the point: the government doesn’t want to fund the age pension for everyone who may be entitled to it, particularly after the Baby Boomer drain has been completed. This becomes truer with every subsequent generation. The fact that over half of those surveyed had no retirement plan at all is reflective of financial apathy that comes with living in a rich western country, but things are changing. The security blanket is being inched out from under us, which makes it more necessary than ever that financial advice is available to everyone, not just those with money. This is in part what not-for-profit super funds are offering with somewhat limited, inexpensive varieties of financial advice for members, but there is still a great deal of work to be done.
What Australians have in mind for retirement
The survey results show that most Australians intend to keep their current standard of living when retired, with the most satisfied retirees having sought financial advice. Human nature is a beast at times, with our capacity to plan ahead actually very limited, so in fact the desire to have a high standard of living is not the same as actually having a high standard of living – most kids wished at some point that they were adopted, and their real parents were rich, beautiful and interesting, and while in that case we get what we get, life in retirement is largely within our control. This fact needs to be more carefully assimilated into Australian culture.
The disconnect between reality and fantasy needs to be bridged, the research shows very clearly, with pre-retirees (aged 45 to 60), unsurprisingly, feeling the most pessimistic about their retirement, but that isn’t coming from a lack of funds necessarily. Regulatory changes are a cause of anxiety for many retirees and investors, and complex rules and regulations make the need for advice even stronger than ever. Navigating the system can be very tiresome and confusing. Generation X and Y are most concerned about longevity.
Once retired, two-thirds report that in reality, their standard of living has not changed, with a mostly-advised minority reporting that in fact their standard of living has improved.
Generation Y are pretty optimistic about retirement, and they should be: they will have the most superannuation saved of anyone before them, and have a long way to go before they need to be thinking hard about their retirement. A quarter of Gen Yers believe they will be better off after retirement, while only 12 per cent of Gen X and just six per cent of Baby Boomers believe as much. Many pre-retirees are expecting a fall in their standard of living once they hit retirement, with over 30 per cent of Gen X and 24 per cent of Baby Boomers also expecting a drop.
The data shows that most people are actually correct when expecting their retirement income to be more or less the same as pre-retirement. The benefits of advice are clearly shown in this research, with advised people always feeling more confident, positive, and prepared.
How legislation fits into this
Superannuation performance has largely recovered since the global financial crisis, and while many retirees had to delay retirement and suffered heavy losses as a result of collapses, the new wave of retirees are not too fussed about performance, but instead are focused on legislation that could threaten to disrupt their plans.
The more informed investors report themselves as being, the more legislative changes are causing them concern. Over 60 per cent of investors self-described as ‘extremely knowledgeable about superannuation and investments’ said they were primarily concerned about regulatory change. This group was also comprised of almost 60 per cent of high net worth (HNW) investors. Advisers also cited legislation changes as a primary concern, but less so, at 40 per cent.
Young investors don’t care
While the idea of even making it past 21 used to seem relevant, living into your 90s is also a strange idea to digest. Young people’s incapacity to fathom being that old is not a stain on their imaginative capabilities, but indeed simply the nature of the human brain. Planning ahead is not highly prized by young people, and certainly planning for being that old seems a stretch, particularly when working low-paying jobs, putting oneself through university or being an apprentice, and then possibly having a young family and home all mean money tends to stay tight for some time in our twenties.
The question is, can we do better? Creating awareness amongst younger investors on how to maximise their retirement income – without having to actually imagine themselves there and truly plan for it – seems a worthy goal that could significantly improve the lives of many Australians down the track.
The study shows that 27 per cent of investors are worried about running out of money in retirement, interestingly with Gen X and Y (34 per cent and 39 per cent respectively) the most concerned. Running out of money becomes more of a reality the closer to retirement you become, and while hindsight is a beautiful thing, it shows how important educating future generations on the value of advice and getting involved in the biggest investment most of them have is.
Younger people tend to see super as something the government has done ‘to’ them, rather than for them, and something they have very little control over. This means engagement levels are extremely low, and making superannuation a bit more exciting could be delved into.
Most Australians are displaying risk-averse behaviours when it comes to their superannuation investments, making advice even more pertinent for many. Conservative investment approaches minimise short-term risks, but do nothing for longer-term goals that often remain unmet. Choosing the best investment approach for an individual’s circumstances and life-stage has been the focus of many super funds’ overhauls of the way they treat member accounts, however almost 70 per cent of those surveyed are very conservative with their superannuation when they choose their strategy themselves, focusing on dividends instead of long-term growth.
About 75 per cent of retirees and 64 per cent of accumulation-stage investors have this conservative approach, with the five per cent self-assessed to be not at all knowledgeable about superannuation using high-risk strategies, compared to 37 per cent of those who are extremely knowledgeable. The preference for those with very little investing knowledge is for cash and term deposits, which the white paper identifies as an obstacle to building retirement savings, particularly in low-interest-rate environments.