Do I stay or do I go: The big decision on your retirement income stream
Having about half a million dollars in superannuation savings would be a dream come true for many Aussies. Literally.
It’s the amount the average worker would love to retire on, although they expect to end up with super balance of $350,000 not the $556,000 of their dreams, according to a Galaxy Poll.
There are very good reasons half a million dollars is seen as a great amount to hold in super. It’s more than double the amount the average person retires on*, and more than enough to secure the $43,665 yearly income it’s estimated a single person needs for a comfortable retirement.**
Modelling by Industry Superfunds shows that even a lower super balance of $300,000, for example, can generate an income stream of $ 17,600 a year.***
Yet, hitting 65 with a very health super balance isn’t entirely worry-free.
That’s because at the point of retirement, there’s a big decision to be made on whether to create an income stream an existing fund manager, or do the same with a new provider.
Research by Rice Warner shows there’s a spike in rollover activity for both men and women at age 65, as many people consolidate their super balances and move into retirement products such as account-based pensions.*****
But the research also shows that rolling over your super balance to a new provider isn’t necessarily the smartest move.
Of the people who switched funds in the 2014-15 financial year, just under half ended up paying higher management fees on their super balance, and more than half got a poorer investment return.
That’s not to mention the fact that transferring funds often involves the payment of additional exit and administration fees.
These outcomes were most extreme for super savers who switched into retail funds, with those who chose industry super funds typically paying lower fees and getting better returns, the researchers discovered.
That retirees make rollover choices that aren’t in their best interest may be because Aussies have a bewildering 41,000 fund and product options to choose from when it comes to investing their super. ******
Research suggests that most of us don’t understand, or aren’t interested in, having so much choice. And having a substantial sum to work with can make the decision more complicated, rather than easier.
One way of navigating the maze of super products is to seek advice from your existing fund manager. Many super funds offer free general advice on super to their members, and some also have a fee-based advice service on offer.
Industry SuperFunds, for example, has advisers who specialise in offering low-cost, commission-free advice.
If choosing your own financial adviser, don’t forget to check that they’re independent and don’t receive commissions or other benefits for selling particular products to their clients, so you can be certain they have no interest in steering you to any specific fund manager or product provider.
Or, if you’ve already made the decision to create an income stream from all or part of your super balance, you could look at a smaller selection of the account-based pension products currently available.
There are many websites that allow you to compare super funds based on their minimum investment requirements and annual fees. Although past performance is not an indicator of future performance, past performance can be a good way to get an idea of how strong a super fund’s returns have been in the past looking at the type of assets it invests in.
As you do your research into potential retirement incomes, however, there is one important thing to keep in mind – your choice will almost certainly have an impact on your eligibility for the Age Pension.
For example, even with a $300,000 super balance, modelling shows it’s possible to receive a pension of $24,200 per year, alongside the average $17,600 annual income mentioned above.***
Deciding what to do with a substantial super balance at retirement can seem like a big task that involves many considerations.
But it comes with a bigger upside – people with a $500,000 super balance were the least likely in the Galaxy Poll to anticipate having financial worries once they’re in retirement. That’s something to look forward to.****
**** Galaxy Research poll conducted for Industry SuperFunds and supplied to Starts at 60
Remember that past performance is not a reliable indicator of future performance. Outcomes vary between individual funds. Consider a fund’s Product Disclosure Statement (PDS) and your personal financial situation, needs or objectives, which are not accounted for in this information, before making an investment decision. For more details about the SuperRatings modelling discussed here see the assumptions on the ISA website
Article first published on Starts at 60 in November 2017. The information referred to may change from the date of publication and care should be taken when relying on such information.