Increasing longevity is a mixed blessing when it comes to retirement income.
You’ll no doubt remember that Joe Hockey copped a Baby Boomer backlash a few years ago when he introduced changes to the Age Pension eligibility rules that would’ve seen Australian workers waiting until they were 70 to access the social security payment.
The outcry from older Aussies was sufficiently scary that the then-treasurer’s money-saving scheme was binned. But spare a thought for the seniors of early last century, who had no pension at all.
A little bit of history
It took a royal commission to get a fair deal for retirees. No, not the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, but the 1906 Royal Commission on Old-Age Pensions.
That royal commission recommended that men aged 65 and women aged 60 should be given a pension to help them through their retirement years. Australia was only the third country in the world to introduce such a non-contributory benefit scheme, beaten only by New Zealand and Denmark.
Sadly, men born in the late 1880s and thus in the prime of working life when what was called the Old-Age Pension was introduced were only expected to live until they were 47, so had little hope of actually claiming the payment. Women were no better off when it came to claiming the pension either, with a life expectancy of almost 51.
Fortunately, a lot has changed since then (even though we’re still having royal commissions!). We’re living to greater ages than ever and most retirees have access to some superannuation savings with which to bolster the income they can get from what’s now called the Age Pension.
You can calculate how much super you’ll have at retirement by using Industry SuperFunds’ retirement balance projector, which will tell you what your super balance will look like at your chosen retirement age, as well as what income you could receive from it.
If the amount is lower than you hoped, there are pre-retirement changes you can make to help build up your balance. But it’s important to also consider the post-retirement choices that you’ll be confronted with that can make a considerable difference to whether your super savings enjoy the same longevity as you do.
Look into an account-based pension
For some inspiration on keeping on top of our spending, the Starts at 60 community is a great place to get some ideas (because Baby Boomers are the best budgeters, after all).
But when it comes to your incomings, let’s take a look at how you can get the best bang for your retirement bucks. According to Gemma Pinnell, the director of strategic engagement at Industry Super Australia, there are some great options for those looking to maximise their income in retirement.
“Super’s not just for people in the workforce,” she points out. “In fact, keeping your money in super right through your retirement can bring you tax advantages, a regular income and even the potential to grow your lump sum,” she said.
You can do this by setting up an account-based pension, which allows you to draw down an income from your super savings, while keeping most of the balance invested. Because the balance remains invested, it has the opportunity to increase through investment returns and thus potentially provide you with an income for longer.
“Having money in low-interest bank accounts and term deposits won’t give you those same tax and potential growth benefits, and you could even find inflation eats away the value of your money over time.”
That’s because the interest rates available on many popular savings products aren’t as high as the rate of price inflation, so your savings don’t grow as quickly as you need them to to match the increasing costs of your purchases.
Choosing just any super fund, however, is not the answer, because just as inflation can put the buying power of your savings at risk, high fees on your fund can also diminish the value of any returns you may receive on your invested super balance.
“It’s well-known that using a high-fee fund, compared to a low-cost Industry SuperFund, can reduce your final payout by tens of thousands of dollars,” Pinnell says.
“And if you’re already retired, the much higher costs of some bank-owned retail funds, compared to an Industry Superfund, can erode your super balance over time. That’s money that could be used to help fund your retirement.”
You can compare how your existing super fund fares against specific retail funds by using Industry SuperFunds’ free, online fund comparison tool.
Make careful choices
Pinnell also notes that Industry SuperFunds can offer a wide range of investment options and payment choices.
“You could draw a regular income from your fund by starting an account-based pension, and subject to a minimum amount, even choose how much you’re paid,” she says.
The government sets a minimum pension factor depending on age, with retirees between 65 and 74 required to take 5 percent of their balance each year.
“By drawing the minimum pension, there’s the potential not just to protect your nest egg against inflation, but grow your account balance over the medium term,” Pinnell added. That’s because the majority of your super savings remain invested.
Industry SuperFunds invest across a broad range of investment classes, including cash, fixed interest, property and shares, with options for investors ranging from stable to high-growth.
Pinnell says this wide range of investment offerings means retirees can pick a strategy that suits their risk profile.
“A retiree who wants to preserve their investment might prefer a conservative option, whereas those who don’t mind the ups and downs of the market might go for growth,” she says.
“Although there’s more security with conservative options, the returns over the long term may be lower so your money might not last as long,” she adds. “Whereas choosing an option with a higher exposure to shares and property may produce higher returns and help preserve your capital, but it’s riskier, and it might be a bumpy road along the way.”
As with any major financial decision, you should consider seeking professional financial advice if you’re unsure which asset class or fund will best suit your purposes. All Industry SuperFunds, for example, offer access to experts who can offer you free, no-obligation guidance on your fund choices.
Consider a longer career
Of course, another way of making your super last longer is to stay at work and not touch it! Being realistic, though, that’s not going to work for everybody, so how about easing into retirement gradually?
A transition-to-retirement (TTR) pension can be a tax-effective way of cutting back on your work hours while keeping the same take-home pay. In brief, it works by permitting you to make drawdowns from your super to top up your employment income, but there are restrictions around the age at which you can begin a TTR and the sums you can draw down.
You can get more information from your fund, or why not try out the Industry SuperFunds calculator to see how it might work for you?
The comforting news is that no matter which option you choose to manage the cost of retirement, Australians are fortunate to have the Age Pension, which provides a backstop should your savings run out – and you can thank a long-ago royal commission for that!
How do you plan to make your retirement savings last as long as possible? Have you used an account-based pension to do so?
This article was first published by Starts at 60 on 2 May 2019. The information referred to may change from the date of publication and care should be taken when relying on such information.