How to ensure you won’t enjoy retirement

How to ensure your retirement will be plagued by worry and uncertainty

They have been called the golden years, but they’ll turn to tin if you make these mistakes, writes Janelle Ward.

Whether retirement is warmly embraced or sleeplessly feared can be the difference between planning well ahead of time and heeding the mistakes of others or being unprepared and unwilling to seek help. With that in mind, here are the retirement moves you don’t want to make.

1. Place your super in the lowest risk investment category

Your super fund invests your money for you. You can choose from a range of investment options, from conservative to growth, and move your funds as you wish. When COVID first hit, there were reports of many members shifting to cash or conservative options. Better to be safe than sorry, right? The problem with that strategy was that in the 202021 financial year, even the worst-performing super funds recorded double-digit returns. Funds left in cash or conservative options did not share in the glory. In late July, Association of Superannuation Funds of Australia’s (ASFA) chief executive Martin Fahy reported that super results had been the strongest in nearly 30 years. In terms of super funds generally, Mano Mohankumar, senior investment research manager at data and analytics provider Chant West, says that over the longest period able to be measured, Australia’s major super funds have delivered on their promises to members to grow their wealth in real terms and protect them from undue risk.

“That’s a great achievement,” he says. “And it’s a message that should be conveyed as widely as possible. Super has proven to be a great way to invest, and people should be confident entrusting their savings to the major Australian funds that are among the best in the world.” If you have a MySuper account, you’ll most likely have a balanced, single diversified option. But it pays to check. And while you’re there, consider how you can bolster your nest egg and reduce tax through salary sacrificing and voluntary contributions.

2. Don’t draw down sufficient funds from your super pension account

The federal government’s Retirement Income Report found the current minimum drawdown rules that apply to account-based super fund pensions – and which have been temporarily halved due to the pandemic – are being viewed as an anchor or guide by many retirees as they spend their super. Mercer research shows that about half of all retirees drawing on their super do not exceed the required minimum amount.

Too many retirees are focused on asset preservation

US asset-management giant T. Rowe Price says: “Conventional retirement income planning assumes that retirees want to maintain a certain standard of living or a certain level of spending and attempt to generate enough income to support that spending level.

“But the data suggest that the opposite might be true. People are flexible about their spending and adjust it to match their income so they can avoid drawing down their assets.”

Underspending in retirement is rampant

Financial analyst Kathryn Del Greco says: “Some people make many sacrifices preparing for retirement. What I see happen is they get stuck in a mindset of not wanting to touch their nest egg and spend it, which compromises their quality of life and what they thought their retirement would look like.” A common regret she sees is people putting off travel and then, suddenly, they can’t take a trip, either due to ill-health or, more recently, the pandemic. “Some people keep putting off enjoying the experiences and pleasures that life has to offer because they’re so busy saving for retirement,” she says. “Retirement doesn’t guarantee that you’re going to have the health to enjoy it. There should be a balance.”

3. Put all your private savings in the bank where it’s as safe as houses

True, but we all know that official interest rates are at record lows. The best term deposit rates on offer as we entered the 2021-22 financial year were less than 1 per cent. Yes, we’re advised to keep an emergency fund that is readily accessible, but too much money in that fund is poor management.

4. Don’t seek financial advice

The YourLifeChoices Older Australian Insights Survey 2021 revealed that 61.3 per cent of the 7000-plus respondents did not seek either financial or retirement planning advice. And yet when asked whether they were confident their savings would provide an income for life, 57 per cent said no. Surveys consistently reveal that financial advice leads to happier outcomes. The IOOF True value of advice survey concluded that people who receive ongoing financial planning advice experience: • 13 per cent greater levels of overall personal happiness • 21 per cent overall increase in peace of mind • 20 per cent increased feelings of security regarding their day-to-day finances • 19 per cent less likelihood of arguments with loved ones.

Those who didn’t receive financial advice were: • 22 per cent more likely to have their sleep disrupted due to money concerns • 15 per cent more likely to feel stress and anxiety • 11 per cent more likely to feel concerned about their finances.

5. Ignore longevity calculators

Today, an Australian male aged 50 years can expect to live another 32.9 years, and a female another 36.3 years. For anyone who retires at Age Pension eligibility age (currently 66.5 years), there’s a long way to go. It is both uplifting and sobering to consider our life expectancy – more time to do the things we always wanted to do and more time to run out of money. But again, confidence comes with planning. There are a number of sites that have free longevity calculators, including mylongevity.com.au and the Optimum Pensions Lifespan Calculator. These will at least open your eyes to the probabilities.

6. Ignore inflation

Part of YourLifeChoices’ mission with the Retirement Affordability Index™ is to track the quarterly rise (or fall) in living costs and give our members a reliable and accurate estimate of different levels of retirement living, be they well-off, constrained or cash-strapped. The numbers go up each year. The Reserve Bank of Australia (RBA) inflation calculator says that a basket of goods that cost $20 in 1990 would cost $40 in 2020. The purchasing power of the dollar takes a hit over time, meaning that an income that was more than adequate at the start of retirement can be stretched thin after even 10 to 15 years – and perhaps be inadequate over a 30-year retirement.

7. Don’t consider how your home can boost your retirement income

In the YourLifeChoices Older Australian Insights Survey 2021, 71.6 per cent of respondents said they owned their home outright and another 12.9 per cent said they owned their home with a mortgage. Given the surge in home prices over the past 12 months, particularly in Sydney and Melbourne where median prices are $1.2 million and $1 million respectively, there’s a lot of wealth tied up in property. And it’s wealth that can be turned into retirement income.

The government offering is the Pension Loans Scheme, which received a partial makeover in the most recent federal budget, but there are also several commercial offerings for reverse mortgage and equity release products. Downsizing is also an option. The federal government’s downsizer superannuation contribution scheme started in July 2018 and allows eligible individuals aged over 65 to place up to $300,000 (couples $600,000) into their superannuation from the sale of their family home.

8. Don’t check at least annually whether you qualify for an Age

Pension or for an increase Challenger’s chairman of retirement income, Jeremy Cooper, told YourLifeChoices that prudent retirees, whether they be 66 or 88, regularly revisit their financial position to determine whether they are receiving the maximum Age Pension income for which they are eligible. The pension is indexed twice a year (apart from in September 2020 due to COVID) and new thresholds could then make you eligible for a pension or a pension increase. 9. Be determined to leave an inheritance The YourLifeChoices Older Australian Insights Survey 2021 found that more than 72 per cent of respondents intended to leave an inheritance and 74 per cent of that group said that aim was not restricting them financially in their lives today. But baby boomers should keep in mind that younger generations will have had the benefit of an entire working life of super contributions when they retire. A Tax Institute report estimates that over the next two decades, Australians aged over 60 will transfer $3.5 trillion in wealth. According to the government’s Retirement Income Review, by 2060, one in every three dollars paid out of the superannuation system will be an inheritance rather than retirement income. “Partly because they have only ever been primed to save as large a lump sum as possible, retirees struggle with the concept that superannuation is to be consumed to fund their retirement,” wrote Treasury. “Because retirees struggle to develop effective retirement income strategies on their own, much of the savings accrued by members through the superannuation system are not used to provide retirement income.” Just pause for thought.

‘What I see happen 10. Don’t connect with is [retirees] get stuck the community, in a mindset of not don’t eat well and wanting to touch their don’t look after your nest egg and spend it, mental and physical which compromises the health There are an increasing number quality of life.’ of ‘superagers’ across the world. Scientists are still studying what makes a superager. What they know is that regular physical and mental activity reduces health risks, intense physical activity increases aerobic capacity, and intense mental activity preserves areas of the brain involved in memory and reasoning. Harvard Health research says: embrace mental challenges, increase your exercise capacity, prepare to be frustrated, don’t let your age deter you and get going with a group. Of course, diet also plays a big part in healthy ageing, with the Mediterranean diet regularly held up as the gold standard. So now you know what not to do. It’s all very well to make your own mistakes, but if someone else has made them before you … DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without considering your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before deciding based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.