According to Milliman’s latest Retirement Expectations and Spending Profiles (ESP), more than half of Australian retirees actually spend less than the Age Pension each year, affected by age and where someone lives. Significant questions are being raised about current retirement policies and super fund strategies. ESP analysed 300,000-plus retirees’ real-world annual spending.
The research suggests voluntary and mandatory measures to boost super may need a deeper understanding of the motivations behind retiree behaviour to be able to improve retirement lifestyles. The findings came as a surprise, given the 50 per cent of median income poverty line snaps at the heels of many retirees.
The latest Australian Council of Social Services Poverty in Australia report estimated 14 per cent of Age Pension recipients live below the poverty line, while the Organisation for Economic Co-operation and Development's (OECD) Pensions at a Glance 2015 report found the issue to be more pronounced. The OECD found more than a third of Australian pensioners lived below the poverty line, and ranked Australia the second lowest on social equity among 33 countries.
The real lived experiences of retirees who are spending less than the Age Pension are not explained. Many people are concerned about running out of retirement savings - men are estimated to live to roughly 86 years of age, while women are estimated to live to roughly 89, according to the government’s 2015 Intergenerational Report. This may be why many retirees with account-based pensions only draw down the minimum annual amount.
Most retirees want to stay in their own home during retirement, viewing it as another safety net if required to pay for later care, but plan to leave the home their children.
Retirees have been encouraged to hold onto their homes by government policies such as excluding the family home from the Age Pension assets test. The 2017-2018 budget proposed allowing those over 65 to sell their primary residence and roll up to $300,000 into super per person.
Home ownership rates have dropped in recent years as record low interest rates have driven an investor-led housing boom. According to the Household, Income and Labour Dynamics in Australia (HILDA) survey, couples aged between 20 and 29 with kids younger than 14 have seen a 13 per cent fall in home ownership.
Single people in the same age bracket with kids younger than 14 have seen a 40 per cent drop. Married couples aged between 60 and 69 with no dependent kids have seen a one per cent increase in house ownership. Single people aged between 50 and 59 with kids have seen a seven per cent increase. There is some evidence that there is a rising proportion of parents who are helping their children get a foot on the property ladder by providing a partial deposit or guaranteeing home loans.
The HILDA survey previously suggested that increases in age reduces the odds of financial stress beyond what can be accounted for by differences in marital status, wealth, household income, labour market experience, and education.
Financial stress is classified as any individual who struggles to pay their mortgage, bills, or rent on time, and has pawned or sold something, forgone necessities, or has sought financial assistance from family, friends, or a welfare organisation. Financial stress is most common among people aged 20 to 29, with 56 per cent experiencing financial stress in 2015, which was down from 61 per cent in 2006.
A separate HILDA data analysis examined individuals' self-reported changes in standard of living, financial security, and overall happiness through the transition to retirement, and found subjective wellbeing remained the same or improved for most people.
The research also found that people who are forced to retire early due to illness or losing their job, and then suffered lower-than-expected retirement income had a significant decline in their wellbeing.
More information is needed to better align super funds’ general advice with the actual experience and need of members.