ISSUE 15 NOVEMBER 2020
Retirement Affordability Index
™
The spending dilemma
As we approach retirement, many realise that accumulating a nest egg was the easy bit. Cracking it can be complicated. Our experts pinpoint the problems – and the solutions. www.yourlifechoices.com.au
It’s difficult to be confident in uncertain times.
With less certainty in the world’s financial markets, making sure your money goes the distance is more important than ever. Take a look at your retirement income with fresh eyes and download Challenger’s Guide to Income in Retirement today. Visit challenger.com.au/incomeguide to get your guide.
Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger Guaranteed Annuity (Liquid Lifetime). This information has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Challenger Guaranteed Annuity (Liquid Lifetime) Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the annuity. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au. All references to guaranteed payments refer to the payments Challenger promises to pay under the relevant policy documents. Neither the Challenger group of companies nor any company within the Challenger group guarantees the performance of Challenger’s obligations or assumes any obligations in respect of products issued, or guarantees given, by Challenger. 41591/0320
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e already believed the YourLifeChoices Retirement Affordability Index™ to be the pre-eminent indicator of the real cost of retirement. And we’ve just made it even better – and more accurate – taking in the very latest Australian Bureau of Statistics data to give you the most up-to-date retirement expenditure table available. In this edition, we discuss how to plan and get your finances in order for a long retirement. This improved Retirement Affordability Index™ is another free tool from YourLifeChoices to help you do just that. Janelle Ward, YourLifeChoices editor
Contents Published by: YourLifeChoices Pty Ltd Publisher: Leon Della Bosca Editor: Janelle Ward Copy Editor: Dairne John Writers: Matt Grudnoff, Jeremy Cooper, Andrew Boal, Stephen Huppert, Jeremy Duffield, Xavier O’Halloran, Janelle Ward Cover Design: Leon Della Bosca Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9081 9997 All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes. IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor. Copyright: YourLifeChoices Pty Ltd 2020
What to do with that nest egg? Independent consultant Stephen Huppert tells what’s missing from retirement products
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September quarter cost of living Who was most affected after living costs returned to ‘business as usual’?
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Budget your way to confidence Use our budget planner to get your finances in order
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Lies, damned lies and statistics Cost-of-living statistics are valuable; the ‘noise’ is not, writes Australia Institute senior economist Matt Grudnoff
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A plan fit for the journey 10 When the job is gone, a sound plan is pivotal, says Challenger’s chairman of retirement income Jeremy Cooper
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Having the confidence to spend 12 An efficient retirement spending system is a work in progress, says the Actuaries Institute’s Andrew Boal Flicking the switch from saving to spending 14 Financial services executive Jeremy Duffield tells why a change of mindset is essential Why advice is critical Our retirement income system sets people up to fail, argues Super Consumers director Xavier O’Halloran
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June quarter cost of living 19 The cost of living fell – for some – in the June quarter Government update Support payments, superannuation changes, Age Pension updates and more
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YourLifeChoices Retirement Affordability Index™ November 2020
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You’ve quit full-time work, now what to do with that nest egg? Independent consultant and adviser Stephen Huppert says a wider range of products and services must be developed to deliver the best retirement possible.
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ou’ve worked hard and are starting to think about life after full-time work. You have nearly $500,000 in superannuation and are thankful that Australia introduced compulsory superannuation contributions when it did. But you can’t stop yourself wondering: Do I have enough? You’re not alone. Survey after survey finds that the fear of outliving one’s savings is one of the top fears for retirees. YourLifeChoices’ 2020 Ensuring Financial Security in Retirement survey found that of the 3000 respondents, only 13 per cent were confident their current savings and income would last for their lifetime. You find plenty of articles on the topic, how much super do I need to retire?, but very little to help you work out what do with your super when you do retire.
The key question to ask is: How much income will I have when I retire and how long will this last? To help answer this question, you need to have some idea of what life after full-time work will look like, how long you might expect to live, and how to convert your retirement savings into retirement income.
The products offered by most superannuation funds are, at best, only a partial solution …
From the government to the superannuation industry to the media – everyone is obsessed with saving for retirement, but without enough attention given to what comes after retirement. Yes, it is important to do whatever we can to maximise our retirement savings but for many of us, there is not much we can do, other than keep an eye on our superannuation, make sure we are in a good fund, and make additional contributions if possible.
Preparing for retirement is much more than asking, Do I have enough? The purpose of saving for retirement is to produce income in retirement, but retirement income was mentioned only once in the recent Federal Budget, and that was a reference to the deferral of the Retirement Income Covenant. This covenant was first announced in the 2018 Budget and, if ever implemented, will require fund trustees to consider the retirement income needs and preferences of their members. It is now due to commence on 1 July 2022. As pointed out in this edition of the Retirement Affordability Index by the Actuaries Institute’s Andrew 4
Boal, Challenger’s chairman of retirement income Jeremy Cooper, financial services executive Jeremy Duffield and Super Consumers director Xavier O’Halloran, it is time to start focusing more attention on what happens to Australians after full-time work, to start having more discussions about what comes next.
Life after full-time work
Jeremy Duffield, who works with Australians approaching retirement, says we need to change the conversation from, “I am retiring from …” and start using the language “I am retiring to …”. Leaving full-time work is not an ending but a new beginning. Those contemplating retirement should start thinking about what comes next. The transition from full-time work involves understanding not just financial goals but also non-financial goals such as health, family and purpose.
Understanding life expectancy Once you have started thinking about what life after full-time work might look like, it is time to assess different strategies and products. When considering the most suitable solution, first you need to estimate how long you could live. Of all the risks in retirement, longevity risk is the one least understood. In simple terms, it is the risk of outliving your savings. Many base their retirement planning on life expectancy without understanding what this actually measures. It is the average for how long a group of people are expected to live based on age and gender.
YourLifeChoices Retirement Affordability Index™ November 2020
Consider an average 65-year-old female born in 1955. She needs to plan to live to age 89 for a 50/50 chance her retirement plan will last as long as she does. What if she wants to be 80 per cent confident that her financial plan will cover her entire lifespan? Then she needs it to last to age 95. That’s around 10 years longer than the simple life expectancy. If she has a partner? Then they really need to plan for one of them to reach 100 to be confident. The chart below shows the distribution of projected lifespans for Australia’s current population of 65-year-old females using mortality rates published by the Australian Government Actuary.
One of the consequences of the accountbased pension is the tendency to underspend in retirement. The majority of retirees draw down the minimum allowable amount – not because that amount fits their plan but because they are worried about drawing down more. This may result in an unnecessarily frugal retirement. If people had more certainty around their level of income and how long it would last, they could potentially spend with more certainty and have a more enjoyable lifestyle. An Australian retiree looking for a more certain retirement income stream has little choice but to purchase a lifetime annuity. That might be suitable for some, but we need more choices to recognise that people’s needs in retirement vary.
Superannuation is not super yet Increasing retirement balances is important but only half the journey. The primary objective of saving for retirement is not to accumulate wealth but to provide retirement income. The delivery of quality outcomes includes helping to convert retirement savings into suitable income streams, including protecting longevity and other risks. This is where more innovation is required, especially when it involves combining retirement savings, the Age Pension and other assets to create retirement income.
Producing retirement income Pre-retirees and retirees need to consider the products that might produce retirement income. Unfortunately, there are limited retirement income product options in Australia, especially if you’re concerned about longevity risk. The products offered by most superannuation funds are, at best, only a partial solution and a poor or inadequate one for those who live a long life. The current standard product offer is an account-based pension that does not protect against longevity risk.
It is incumbent on the financial services industry to improve its retirement offerings with products, services and tools to better help Australians convert their hardearned retirement savings into retirement income. Stephen Huppert has had nearly 30 years’ experience in superannuation, wealth management and life insurance. He works as an independent consultant and adviser partnering with institutions big and small that are committed to improving the retirement outcomes of Australians. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account 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 making a decision 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.
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Cost of living returns to normal transmission
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nflation was higher than expected in the September quarter, following the biggest decline in 89 years during the previous period when childcare was free and the cost of petrol dropped almost 20 per cent. The Consumer Price Index (CPI) rose by 1.6 per cent in the September quarter after a 1.9 per cent drop in the June quarter. Other than childcare, the most significant price rises were: petrol (up 9.4 per cent), preschool and primary education (up 11.1 per cent), furniture (up 6.4 per cent), major appliances (up 5.3 per cent) and small appliances (up 5.8 per cent). The figures showed uneven inflation around the nation, with prices in coronavirus-stricken Affluent Couples Expenditure items Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure Food & non-alcoholic beverages As a percentage of expenditure Alcoholic beverages & tobacco products As a percentage of expenditure Clothing and footwear As a percentage of expenditure Household furnishings & equipment As a percentage of expenditure Household services & operation As a percentage of expenditure Medical & health care As a percentage of expenditure Transport As a percentage of expenditure Communication As a percentage of expenditure Recreation As a percentage of expenditure Education As a percentage of expenditure Personal care As a percentage of expenditure Miscellaneous goods & services As a percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure
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Melbourne only 0.9 per cent higher but up 2.3 per cent in Brisbane and Canberra. Transport costs rose in all capital cities as global fuel demand partially returned and production fell. The overall inflation figure is well below the Reserve Bank of Australia’s target band of 2 to 3 per cent. The biggest cost-of-living increase was experienced by single self-funded retirees who own their home (+1.6 per cent), followed by single homeowners who receive a full or part Age Pension (+1.5 per cent) and self-funded couples and homeowners who receive a full or part Age Pension (+1.4 per cent). Single renters who receive an Age Pension experienced a 1 per cent increase and couple renters a 0.9 per cent increase.
Constrained Couples
Couple Couple homeowners homeowners with private on Age income Pension $182.75 $108.01 12% (-1%) 13% $44.12 $33.14 3% 4% $248.19 $174.80 17% 21% $56.25 $29.79 4% 4% $30.98 $17.58 2% 2% $78.06 $33.87 5% 4% $39.91 $28.23 3% (+1%) 3% $148.82 $106.07 10% 13% $187.75 $121.88 13% 14% $34.30 $24.30 2% 3% $297.07 $100.88 20% 12% $0.61 $0.22 0% 0% $29.69 $18.02 2% 2% $90.56 $48.84 6% 6% $1,469.04 $845.63 +$19.76* +$11.43* $6,365.85 $3,664.41 +$85.76* +$49.56* $76,390.16 $43,972.93 +$1,029.06* +$594.78*
CashStrapped Couples
Affluent Singles
Couple who rent on Age Pension $204.57 29% $34.98 5% $158.06 22% $48.35 7% $9.30 1% $20.61 3% $15.25 2% $36.73 5% $57.95 8% $26.30 4% $65.59 9% $0 0% $12.52 2% $24.42 3% $714.63 +$6.52* $3,096.72 +$28.26* $37,160.62 +$339.10*
YourLifeChoices Retirement Affordability Index™ November 2020
Constrained Singles
CashStrapped Singles
Single Single Single who homeowner homeowner rents on Age with private on Age Pension income Pension $122.79 $90.63 $161.16 15% 19% 36% $31.91 $28.56 $24.24 4% 6% 5% (-1%) $124.69 $87.64 $78.54 15% 19% 18% $29.43 $17.25 $24.02 4% 4% 5% $20.61 $8.94 $7.37 2% 2% 2% $42.71 $19.83 $15.82 5% 4% 4% (+1%) $36.00 $20.35 $10.81 4% 4% 2% $85.45 $37.84 $22.39 10% 8% 5% $99.46 $50.72 $34.21 12% 11% 8% (+1%) $33.19 $17.14 $13.37 4% 4% 3% $138.36 $52.05 $31.41 17% 11% 7% $0.13 $0.12 $0.01 0% 0% 0% $18.50 $9.76 $8.65 2% 2% 2% $54.96 $26.75 $16.66 7% 6% 4% $838.19 $467.57 $448.67 +$13.20* +$6.75* +$4.49* $3,632.17 $2,026.16 $1,944.23 +$52.23* +$29.27* +$19.47* $43,586.07 $24,313.87 $23,330.73 +$686.84* +$351.16* +$223.60*
*Percentage and dollar changes compared with June quarter figures
How does your spending compare? Expenditure items
Affluent Couples
Constrained Couples
CashStrapped Couples
Affluent Singles
Constrained Singles
CashStrapped Singles
Housing Rent, interest, home repairs and maintenance & body corporate fees As percentage of expenditure Domestic fuel & power Electricity, gas & oil As percentage of expenditure Food & non-alcoholic beverages Includes meals in restaurants As percentage of expenditure Alcoholic beverages & tobacco products Alcohol consumed at licensed premises As percentage of expenditure Clothing and footwear Dry cleaning, repairs & alterations As percentage of expenditure Household furnishings & equipment Outdoor furniture, floor and window coverings, linen and bedding, appliances, glassware, tableware and cutlery, tools & mobile phones As percentage of expenditure Household services & operation Cleaning and garden products, phone charges (including mobile), pest control & home cleaning services As percentage of expenditure Medical & health care Health insurance, doctor and dental fees, medicines and pharmaceutical products, prescriptions & hospital and nursing home charges As percentage of expenditure Transport Purchase, maintenance and insurance of vehicles, fuel & public transport fares As percentage of expenditure Communication Spending on telephone (including fixed line and mobile) Spending in internet services As percentage of expenditure Recreation AV equipment including TVs and pay TV, books, newspapers and magazines, camping and fishing equipment, sports equipment, internet charges, holidays & animal expenses As percentage of expenditure Education Primary and Secondary school fees (including school sport fees) TAFE and University fees (including HELP) Fees to all other private education institutions As percentage of expenditure Personal care Toiletries, cosmetics & hairdressing As percentage of expenditure Miscellaneous goods & services Stationery, watches and jewellery, interest payments on credit cards and all loans (excluding home loans), education, rates and charges on investment properties, accountant and tax fees & cash gifts As percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure
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Cost-of-living statistics are valuable; the ‘noise’ is not Quarterly statistics would seem to be bread and butter for Australia Institute senior economist Matt Grudnoff, but he has a cautionary tale.
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tatistics can be a powerful tool to give us insights into complicated issues. But, there’s a famous phrase that goes: ‘There are three kinds of lies: lies, damned lies and statistics.’ So, how do you avoid being fooled? This edition of the Retirement Affordability Index provides a great example. The change in the timing of when the Retirement Affordability Index is published has meant that there have been two quarters of CPI data since we last talked about retirees’ cost of living. While it wasn’t planned this way, it was probably the best two quarters to combine in this analysis. Why? Because the June and September quarters saw massive quarterly movements – June 2020 saw the biggest fall ever and September had one of the biggest increases in the past 20 years.
Looking at both quarters together, we can see that the cost of living for retirees has fallen, not risen as the September data would have us believe.
“But there is a problem at the heart of all attempts to measure inflation and cost of living. The measurements become less accurate if there is a sudden change in households’ spending patterns and the changes in spending are on items that have seen big changes in price.” The recession, the shutdown and the government’s response to it were the drivers for these big changes. The two biggest were: • the government making childcare free in the June quarter (and then making it expensive in the September quarter) • fewer people travelling in lockdown causing the fall in petrol prices in the June quarter, followed by the increase in petrol prices as states opened up again in the September quarter. Movements in our six RAI cohorts are a good example. The figure below shows the movement in June 2020 when prices fell. It also shows the movement in September 2020 when they all rose again.
Sounds exciting right? Well, movements in quarterly data are beloved by commentators who are always keen to weave a story out of those changes. But these two quarters have moved in roughly opposite directions. This means they have largely offset each other. The June quarter Consumer Price Index (CPI) went down a massive 1.9 per cent, while the September quarter jumped back 1.6 per cent. Both movements were entirely predictable. Indeed, I did just that in my last Retirement Affordability Index article, Is deflation good news for your living costs? I wrote: “The Retirement Affordability Index – and its six tribes with six different spending patterns – allows retired households to find a spending pattern that more closely matches their own and thus gives them the most accurate inflation rate. 8
The big decreases and increases are not as important as the net change over the two quarters. The real question is, was the fall in June bigger or smaller than the increase in September? The next figure (on page 9) shows just that. We see that the falls were bigger than the increases. This is the real story that could get lost in the quarter-by-quarter movements.
YourLifeChoices Retirement Affordability Index™ November 2020
The Australian Bureau of Statistics (ABS) always says to look at the trend data. This is the data that has been smoothed by a rolling average. The ABS says the trend data gives the best understanding of what is happening, by eliminating the volatile ‘noise’ in the data. Despite this, you will always see the media and commentators use the seasonally adjusted data, which is much more volatile than the trend data. Movement in data means a story can be created. And the media love a story – even if that story ends up being just volatility in the data. Looking at both quarters together, we can see that the cost of living for retirees has fallen, not risen as the September data would have us believe. But it has not fallen nearly as much as the June data would have us believe. What does the longer-term story tell us? The next chart shows us the difference in the increase in the cost of living for each of our six cohorts since June 2017. We see that until the last two quarters, they increased steadily except for a small blip in March 2019, when petrol prices fell back from previously high levels. But even that blip didn’t change things very much.
As a general rule, affluent retirees (homeowners with private income) experienced a slightly lower increase in their cost of living and cash-strapped retirees (renters who receive an Age Pension) a slightly higher increase in their cost of living. Constrained retirees (homeowners who receive a part or full Age Pension) are in the middle. The most recent changes are big compared to previous years, with the recession and pandemic likely to have a big ongoing impact on living costs. Inflation will remain low with decreased demand in the economy. Businesses struggling to maintain sales won’t put up their prices. But the changes are not nearly as big as the quarterly figures would have us believe. The lesson here is that it is better to take a longer view if you want to really know what is going on. Short-term volatility might be the perfect material to build an exciting story, but noise in the data ultimately tells you nothing. Remember: in eight out of five people, three don’t exist. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account 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 making a decision 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.
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A long life is a wonderful thing – if you’ve planned for it When the ‘safety net’ of employment has disappeared, the importance of a sound financial plan is pivotal, says Jeremy Cooper, Challenger’s chairman of retirement income.
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learly, living longer is more attractive than the other option, but it does mean retirees need to think hard about their financial strategy in retirement. A financial strategy in retirement is very different to a strategy ahead of retirement. The first phase, the accumulation stage, which takes place before you retire, is easier. There’s a safety net. If the financial performance of your accumulated assets, be they in superannuation or outside, don’t match your expectations, most people can keep working for a bit longer and rebuild their assets.
workforce for decades, having saved money along the way. The generations after the baby boomers will mostly have enough of their own money to fund their retirements, without needing an inheritance. • And, of course, you can’t take your money with you when you go. Keeping those facts in mind, how do you work out a financial strategy for the period you are in retirement? The hardest part is knowing how long you are going to live. You don’t. This longevity risk is one of the toughest parts of the financial strategy in the retirement puzzle. Everyone is going to die. We can be confident of that. We just don’t know when we are going to die.
This longevity risk is one But once you stop working, and you are in your 60s, or 70s, or of the toughest pieces of 80s, it’s much harder to get a job financial strategy in the again. The ‘safety net’ of working more has disappeared. It’s why retirement puzzle. developing a financial strategy for the decumulation phase of Most financial plans implicitly assume a certain age your investing – that is your retirement years – is of death, as if it’s known. A woman retiring today at so critical, and so different to the financial strategy age 66, can be expected to live until 90. In reality, applicable to your working years. around two-thirds of women retiring at 66 will live to Everybody thinks about what to do with their between 81 and 99. money in retirement. But many still think about If 90 is the age a financial strategy in retirement is investing in terms of the accumulation of wealth, not based on, then a plan that lasts up until that age will decumulation. disappoint almost half the population. That’s a poor The goal is to have built a nest egg by the time retirement arrives, which will be enough, along with the government pension, to enjoy your final decades. Note that retirees need to provide for decades – 20, 30-plus years. That’s a long time.
outcome.
There are a few things to remember when thinking about the decumulation phase – think of them as parameters.
So, what’s the solution?
• Most people will need to spend not just the income they earn in retirement, but also the capital or lump sum they built up, if they want to maximise their retirement income. • Following from that, their children, by the time they reach retirement age, will have been in the 10
Not knowing when a person’s life will come to an end makes managing finances very difficult. Using life expectancy figures might make sense initially, but in fact are misleading most retirees. You can take your chances, go out and spend, and worry about the future when you run out of money. You will probably be pretty miserable, at least financially, towards the end of your life though. Alternatively, you could be miserly and make sure your money lasts well beyond your life expectancy. The downside is you’ll miss out on plenty of the good stuff between now and then.
YourLifeChoices Retirement Affordability Index™ November 2020
A better solution is to have a good plan – a good financial strategy in retirement. That’s something many retirees don’t have. YourLifeChoices’ 2020 Ensuring Financial Security in Retirement survey shows the No.1 concern among retirees is that they will lose their savings as the share market falls. It also highlights several other factors that are more easily addressed than picking share markets. Almost half the people surveyed did not use a financial adviser. Of those who did, an overwhelming majority – 85 per cent – were happy or very happy with the help they received. And two in five incorrectly believed that superannuation offered guaranteed income for life. Super pays income, but the amount and length of time it is available depends on financial markets and how much people draw down, and for how long. Another worry for retirees was fear of outliving their savings. The survey also found that people dislike a loss more than twice as much as they like an equivalent gain. When you put all that together, what does it mean? Every retiree needs a financial plan in retirement. And the ‘Holy Grail’ is a plan that’s simple to understand and easy to implement when shifting from the accumulation stage to the decumulation stage. The plan would consider that people not only live to different ages, but also change the way they behave along the way. As we get older, most of us spend less on travel and other discretionary items.
It would include a method to cover everyday expenses – something that gives peace of mind that no matter how long a person lives, they will still have money to pay the household bills. It would recognise that many higher health costs are increasingly paid for by the government and health insurance as people get older. There isn’t as much need to keep money aside for medical emergencies. The plan would take into account what a person thinks is their minimum financial requirement later in life. That’s unlikely to be as much as they needed when they first retired. It would allow them to spend their money without fear of running out. A financial strategy in retirement makes sure people’s regular expenses are covered for as long as they live. Not only does it provide a financial benefit, it also provides peace of mind. And that allows people to enjoy spending in retirement, confident that their money will last. Jeremy Cooper is Challenger’s chairman of retirement income and focuses on research, public policy issues and thought leadership. Before joining Challenger, he chaired the ‘Cooper Review’ into the superannuation system, and those recommendations have been substantially adopted. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account 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 making a decision 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.
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How to give retirees the confidence to spend Super balances are steadily growing, but an efficient retirement spending system is still a work in progress, writes the Actuary Institute’s Andrew Boal. He pinpoints the problems and offers some solutions.
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ustralia has one of the best retirement systems in the world for accumulating savings. Yet, like many other countries, we continue to struggle with how to design an efficient retirement spending system. To some extent, this can be attributed to the absence of a clear purpose as to what we are trying to achieve. Following a recommendation by the Financial System Inquiry, the Superannuation (Objective) Bill was introduced to Parliament in 2016 to establish the primary objective of super: “to provide income in retirement to substitute or supplement the Age Pension”. While it is a start, it does not provide a lot of direction. The Explanatory Memorandum provided more guidance, and two of the proposed subsidiary objectives noted at the time were to facilitate consumption smoothing over the course of an individual’s life, and to manage risks in retirement. Unfortunately, these objectives have lapsed in Parliament, so we still have some uncertainty about the overall pathway to better retirement outcomes. More recently, in September 2019, Treasurer Josh Frydenberg announced a review into the retirement income system as recommended by the Productivity Commission in its report, Superannuation: Assessing Efficiency and Competitiveness. The panel appointed to run this important review was given the task of identifying the facts that will help improve understanding of how the retirement income system operates and the outcomes it is delivering for Australians. The terms of reference for the review state: “It is important that the system allows Australians to achieve adequate retirement incomes, is fiscally sustainable and provides appropriate incentives for self provision in retirement.” In this context, the panel identified four principles to assess the performance of Australia’s retirement income system: adequacy, equity, sustainability and cohesion. This latter one, cohesion, is particularly important. How do the various parts of the system work together to improve retirement outcomes in Australia? 12
Retirees in ‘the middle’ It is only recently that a significant number of Australians began retiring with material retirement savings, with around 35 per cent of superannuation balances at retirement reaching $250,000 or more. Over the next 20 years, this is set to change with almost 65 per cent reaching that level. While around 15 per cent of superannuation balances will exceed $750,000 in 20 years’ time, as a proportion, retirees in ‘the middle’ will double from around 25 per cent to 50 per cent. Retirees in this ‘middle’ group are likely to be eligible for a part Age Pension for a substantial portion of their retirement and, as a result, the means test rules will be an important consideration for them. As we all know, the means tests are targeted to help keep the cost of the Age Pension at an affordable level as Australia’s population ages. But this also makes them complicated and more difficult for retirees to navigate. It is also worth noting that legislation was passed in February 2019 to amend the means test rules that apply to longevity protection products with effect from 1 July 2019. Under the new rules, only 60 per cent of the purchase amount of a lifetime income stream will be an assessable asset and only 60 per cent of the payments will be income for the means tests. These regulatory changes should, in time, promote the development of new longevity protection products such as deferred lifetime annuities (DLAs) or deferred group self-annuitisation (GSA) products, which should help retirees plan their retirement spending with more confidence. However, they add further complexity. By way of example, consider a person who is a homeowner, who retires at age 67 with a superannuation account balance of $500,000 and who uses $50,000 to purchase a DLA. With 40 per cent of the purchase price (or $20,000) no longer counting for the assets test, this person will be entitled to $1560 per annum more in Age Pension payments for around 10 years.
YourLifeChoices Retirement Affordability Index™ November 2020
The confidence to spend Longevity risk is one of the major risks faced by retirees. The fear of running out of money and the uncertainty about how long a retiree might live causes many to try to manage their own longevity risk by spending cautiously. In addition to its favourable treatment under the means tests, a DLA partially solves that problem by providing a guaranteed amount of income for life once payments commence. This allows retirees to more safely draw down the remainder of their savings up to that point, thereby enjoying a lifestyle that is better than would otherwise be the case during the early and more active years of retirement. Unfortunately, DLAs and other annuity products are often criticised as being ‘expensive’. The question is: compared to what? This is often because people undervalue the insurance component of the product, but also because of the conservative nature of the investments typically backing these products. Retirees who want to leave a bequest to their family also prefer to add a death benefit to the product, which also makes them more ‘expensive’. Maybe it’s time to go ‘back to the future’, where the annuity is a form of ‘with profits’ or unit-linked policy so that the policyholder shares the investment return (and risk). The number of units paid each year until death would remain the same, but the dollar amount would vary depending on the performance of the underlying investments selected by the retiree. Unit-linked DLAs would have two distinct advantages over traditional annuities. First, these products could remain invested in more growth assets during the deferral period, much like an account-based pension (ABP), with retirees able to dial down the risk profile of the investments as they get older, either by choice or automatically, via a form of life cycle investment. Second, they would be more attractive to advisers who understand investment risk and return and can assist their clients with their choices. As annuities are not well understood in the general community, some form of guidance and/or advice will be needed to help retirees understand how DLAs and other retirement products can help them manage the various risks they will face in retirement.
Retirement Income Covenant One of the announcements in the 2020 Federal Budget was the deferral of the Retirement Income Covenant to July 2022, which will allow the findings of the Retirement Income Review to inform the discussions and any further consultation. According to Treasury, the covenant will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement. The covenant is supported by a number of principles, key among them that: • Trustees should develop a retirement income strategy for members. • Trustees should offer all members a comprehensive income product for retirement (CIPR) which, by design, would provide longevity protection and some access to capital. • Trustees should provide guidance to help members understand and make choices about the retirement products offered by the fund. We now look forward to the release of the Retirement Income Review report and the ensuing consultation on the covenant, the introduction of new retirement income products, and the development of affordable access to better information, guidance and advice. Together, we will then be better able to help more members secure a better retirement, where they can spend more of their savings safely, especially in the early years of retirement when they are healthier and more able to enjoy it. Andrew Boal is head of the Actuaries Institute’s Retirement Strategy Group and CEO at Rice Warner. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account 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 making a decision 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.
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Flicking the switch from saving to spending is tough for many You’ve spent decades accumulating your nest egg, then you need to get used to spending it. Financial services executive Jeremy Duffield tells how to change your mindset.
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hen you no longer have a job topping up your bank account regularly, working out your spending in retirement is quite a challenge. It’s a big mind shift that many people struggle with. A friend of mine, consultant Stephen Huppert, compares the switch from saving for retirement to drawing down savings for spending in retirement as like a cyclist’s switch from riding up the hill to riding down it. The downhill is more unknown, uncertain and risky. It requires a change in thinking, lest you go over the edge. In the Tour de France, riders often get up to speeds of 110kph on the downhill sections. Terrible accidents sometimes occur, as in 2017 when Australian Richie Porte lost control at 120kph and fractured a collarbone and a hip. Now, retirement shouldn’t be that scary! You’re looking for peace of mind, not thrills. Still, it does require a change in thinking. The change is hard for a number of reasons. First, you’ve spent maybe the past 30 or 40 years saving for retirement, watching that nest egg grow. That felt good, to see the progress you’ve made. You’ve just been able to leave it there and let good markets, compound earnings and your contributions make it bigger. It’s become a pile, most likely larger than you’ve ever had before. But now, you’ve got to switch to using the pile to fund your retirement living. You’re going to have to draw it down to get yourself what you might call a ‘retirement salary’. The pile’s probably going to shrink ... well, that doesn’t feel so good – does it, Uncle Scrooge?
Second, you’ve got to work out just how much you can afford to take from the pile. That’s not easy because you want to have enough money to live comfortably and you want it to last your lifetime. And you don’t know how long you (and your partner) are going to live or what investment returns you’ll earn. Who knows what the financial markets will do in the years ahead? Third, you’re also probably looking for some help from the government’s Age Pension, either now or in the future. How do you factor that in? How much you can spend in retirement is actually very complicated. It’s like the problem of how much water a farmer should use to irrigate his crops and still last the long hot summer. It’s the type of problem actuaries get paid big money for solving. But you don’t have an actuary in the family, do you?
How to be a good downhill rider There are a number of things you can do to find peace of mind in the drawdown phase. First, make the mind shift. You’re not Scrooge and the point isn’t to die with a big pile of money. We often see that type of behaviour in real life. Australian Bureau of Statistics figures show that savings for retirees typically rise as they get older and many die with large sums, leaving the money to heirs. They’re underspending compared to what they can afford. It’s most likely due to the natural human fear of running out. Result: we underspend. As my co-director at Retirement Essentials, Professor Deborah Ralston, says: “People often overestimate the potential costs of health and aged care in their later years. But there’s a lot of government assistance for that. And so many people reduce their spending below a comfortable level as a precautionary measure.” Second, get your Centrelink entitlements in place as soon as you’re eligible and look to make the most of them. The Age Pension is a fabulous asset for senior Australians. The maximum Age Pension is now
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YourLifeChoices Retirement Affordability Index™ November 2020
$37,000 per annum for a couple and $24,500 for a single. It’s reviewed semi-annually, based on the cost of living and, until this September, increased in each of the past 70 years. And it lasts a lifetime. You can check your Age Pension eligibility here. Even someone who’s not eligible now for the Age Pension – maybe due to having too much in assets – may well become eligible later in life as savings are spent down. So, it’s a great safety net – effectively meaning that the floor on your retirement income is the maximum Age Pension. Third, understand your planning horizon. We Australians are living longer than we think. The average man’s life expectancy at age 65 is 85 and the average woman’s is 87. However, that means that about half the people will live longer than that. So, unless you’re not healthy, planning to live into your 90s is probably a safer bet than planning on your 80s. For example, for a couple both currently aged 65, there’s a 24 per cent chance that one person will still be alive at age 95. And recognise you could live to be 100 or more. The chart below shows a case study illustrating the impact of long living on what you can afford to spend. It’s for a couple, both aged 66, who have $500,000 between them in financial assets. The longer they are expecting to live, the less they can afford to spend each year. If they were only going to live until 75 – or were prepared to live entirely on the Age Pension after that – Retirement Essentials estimates they could spend $81,900 per year. But if they were planning for a horizon of 90, then $56,400 per year would be a more reasonable expectation. And if planning for 100, then $51,800 would be suitable.
Each quarterly edition of YourLifeChoices’ Retirement Affordability Index tracks changes in the estimated cost of living for three cohorts – the affluents, constrained and cash-strapped retirees – through a formula developed by The Australia Institute. Australian Super Funds Association also publishes its ‘modest’ and ‘comfortable’ living standards. Keeping control of your budget is a key task for retirees. It’s tough to go out and make up gaps with a part-time job as you get older, so keep good tabs on what you are spending. And don’t forget to plan for unexpected and lumpy costs – such as a major repair on the house or a new car at some point. It’s always good to keep six months or more of emergency funding available, in case you need it. One other thing, if you’re retired (over 60) and still in an accumulation super account, you should consider the advantages of an account-based pension. Many people let inertia carry them along and just stick with the regular super account, which is taxed at up to 15 per cent on investment earnings. At Retirement Essentials, we find almost 30 per cent of our Age Pension clients are still in accumulation super, whereas earnings on an account-based pension, which is designed for the drawdown phase, are tax free – leaving more in your pocket. It takes a bit of effort to make the move, but it’s usually worthwhile.
Summing up Fourth, work out how much you need and how much you’d like to spend. Everyone has basic needs – we call that your ‘required spending’. And everyone has some extras they’d like, whether including travel or entertainment or gifts for the grandkids. We call the total of ‘required spending’ and the extras ‘desired spending’. It may well turn out, too, that you’ll want to spend more in your earlier years of retirement and less as you get older. That’s the general pattern in Australia. Average spending tends to decline as people get older.
You can see there’s quite a bit to this drawdown phase. With a bit of careful planning – and maybe some professional help from a financial adviser – it can be a safe and enjoyable ride on an easy downslope. Jeremy Duffield is a senior executive in the Australian and international financial services sectors. He is the chairman of Retirement Essentials, which assists people to apply for the Age Pension, and of SuperEd, which is focused on helping super fund members plan for their retirement. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account 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 making a decision 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.
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Our complex system makes independent advice critical The retirement income system is setting people up to fail because of its complexity, writes Super Consumers director Xavier O’Halloran.
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uperannuation is designed to ensure people can financially support themselves in retirement. However, media coverage and public debate tends to overwhelmingly focus on the savings phase (accumulation) rather than the spending phase (decumulation). With so much of the conversation dominated by how to grow your retirement nest egg, it’s easy to feel unprepared when it’s time to decide how to actually access the money you’ve saved.
The system is too complex One of the reasons this is daunting is that Australia is the only OECD country that has a mandated, prefunded accumulation structure without a mandated decumulation structure. Unlike in other countries, where a defined benefit pension is more common, Australians have to make an active decision about when and how they’ll access their super in retirement – whether as a transition to retirement pension initially, a lump sum, an accountbased pension, an annuity or as a mix of these.1 In making this decision, people need to consider a range of factors and projections, most of which they are not well equipped to deal with on their own. People want simplicity in their finances. Instead, they are left to navigate decisions on tax, access to the Age Pension and other government benefits. When coupled with the uncertainty of life expectancy and future expenditure needs, the system is setting people up to fail. This is compounded by very human responses to complexity, known as behavioural biases. For example, people tend to place more focus on the immediate concerns before them, making long-term planning harder. It’s no wonder that pre-retirement can be a stressful stage of life. Earlier this year, Super Consumers Australia conducted a Retirement in Australia survey, which found that a sizable majority of the more than 10,000 respondents struggled to navigate the retirement income system.2 They perceived planning for retirement as more complicated than almost every other consumer decision they need to make. 16
Good advice is hard to find We asked respondents to tell us what (if any) resources they used to help them with retirement planning. Many people nominated super funds (41.6 per cent) and financial advisers (40 per cent) – two sectors that the financial services royal commission identified as struggling to overcome conflicts of interest in their business models. Super funds can and should provide targeted and strategically timed information to people about the decisions they will need to make in the lead up and during the decumulation phase, and when they will need to make them. Their educative role can also extend to encouraging people to think about their super not as just a current lump-sum balance, but as a potential future income stream – for example, by projecting potential ranges of retirement incomes in member statements.3 Beyond this, it is problematic for super funds to have a role in providing personal retirement planning advice to members given the potential for such advice to be conflicted. A recent review by the Australian Securities and Investments Commission (ASIC) found that superannuation fund advice failed the best interests duty in 51 per cent of cases.4 The superannuation fund business model is built on growing the size of the fund and, for some, extracting profit from charging percentage-based fees on invested capital. Therefore, there is a strong disincentive to give advice that sees this capital move elsewhere, for example to a betterperforming fund or what might be a more suitable investment option outside of superannuation (e.g. paying down a mortgage). 1 Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 1: Overview, CEPAR research brief’, November 2018. https://cepar.edu.au/sites/ default/files/retirement-income-in-australia-part1.pdf 2 While not nationally representative, the survey provides useful insights into consumer sentiment about retirement planning. 3 Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 3: Private resources’, November 2018, p31. https://cepar.edu.au/sites/default/ files/retirement-income-in-australia-part3.pdf 4 ASIC, Report 639: Financial advice by superannuation funds, December 2019, p30. https:// download.asic.gov.au/media/5395538/rep639-published-3-december-2019.pdf
YourLifeChoices Retirement Affordability Index™ November 2020
The picture gets worse when we look at financial advice provided by vertically integrated providers such as banks, with ASIC finding 75 per cent of the advice files they reviewed were in breach of the law.5 Meanwhile, financial advice in the self-managed super space fared even worse, with ASIC finding that 91 per cent of the advice files they reviewed did not demonstrate compliance with the legal requirement to provide appropriate advice.6 Government resources such as Moneysmart and the Financial Information Service (FIS) can be helpful, but also have drawbacks. For example, Moneysmart is a free, valuable service run by the regulator, but doesn’t give personal advice, while the FIS does not offer online access to its service or tools and has been criticised for not being appropriately targeted at those who actually need it.7 Australians aren’t alone in facing this problem; retirees in the UK have faced similar struggles. In 2015, UK retirees were given new ways to access their retirement savings, such as lump sum payments. However, they weren’t given much advice on how best to maximise those savings. This saw people making poor decisions and, in some cases, being scammed out of their retirement savings. The UK government’s attempt to fix this problem is still in its early days, but it is promising. The Money and Pensions Service was announced by the Queen in 2017 and launched a couple of years later. It is
funded out of a small levy on everyone’s pension savings, but then costs nothing extra to access. The service provides answers to common financial questions people have throughout their lives, from saving for a first home to planning for retirement. Its Pension Wise service gives people access to free, impartial, specialised guidance – delivered face to face or over the phone – about their pension options. It also provides a free, online tool to help people choose how to access their pension money. The tool provides users with a brief summary of the different options for taking a defined contribution pension. Users can select those they are more interested in for more detailed information, and can then choose extra information, e.g. how their pension is taxed.8 Back in Australia, we still lack access to a one-stop shop for independent, affordable and trustworthy retirement advice. It is something we have urged the government’s (yet to be released) Retirement Income Review to consider. 5 ASIC, Report 562: Financial advice: Vertically integrated institutions and conflicts of interest, January 2018, p35. https://download.asic.gov.au/media/4807789/rep-562-published-04july-2018.pdf 6 ASIC, Report 575: SMSFs: Improving the quality of advice and member experiences, June 2018, p63. https://download.asic.gov.au/media/4779820/rep-575-published-28-june-2018.pdf 7 See Super Consumers Australia, ‘Submission to the Retirement Income Review’, February 2020, pp26-27. https://static1.squarespace.com/static/5d2828f4ce1ef00001f592bb/ t/5e40e104120d25193d95e0a9/1581310217333/Super+Consumers+Australia+Retirement+I ncome+Review+Submission+%281%29+%281%29.pdf 8 https://www.pensionwise.gov.uk/en
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For example, the Centre for Excellence in Population Ageing Research (CEPAR) has suggested that mandated annuities, which are a feature of the retirement system in the Netherlands and convert an investment into an income for a period of time, may be more cost effective in providing for people in retirement and may even simplify decision making.10 They have also proposed a ‘MyPension default’ option that could meet the needs of the majority, while allowing for people to ‘opt out’ into a choice product.11 Super Consumers is a strong advocate of extending the benefits of default product design from the accumulation to the decumulation phase. As we noted earlier, a large majority of people find retirement planning decisions complex and, therefore, lack confidence in navigating the system. The quality of financial advice is still being held back by conflicts, and many people can’t or won’t seek advice because it is expensive and can’t always be trusted. Also, decision making becomes more difficult and rates of cognition impairment increase as people age.
Access to advice provided by For some time now, the an independent, trustworthy Australia is the only government has been organisation (such as the UK considering a policy measure OECD country that has Money and Pensions Service) that would require funds to would remove many of the a mandated, pre-funded offer Comprehensive Income inherent conflicts created Products for Retirement accumulation structure by conflicted remuneration 9 (CIPRs) to members as part and vertical integration. The without a mandated of a covenant introduced in Retirement in Australia survey legislation governing super. decumulation structure. found that older pre-retirees, CIPRs would include riskparticularly, wanted access to a pooling, with simplified and helpline and a trusted person to standardised information disclosures. Progressing help them navigate retirement decisions. Given this framework has been paused pending the that the complexity of decision making increases Retirement Income Review. as people near retirement, this added level of assistance is understandable. As Australia’s population continues to age, the
Advice has its limits It is fair to say a lot more thought has gone into the accumulation phase of retirement saving compared to when people come to spend it in retirement. As people save, they are supported with generally higher quality default options, so if they aren’t making active choices the system still offers some protection.
weaknesses in the decumulation system discussed above will be magnified. Like others, we are eagerly awaiting the release of the Retirement Income Review’s findings to inform future policy directions. Xavier O’Halloran is the director of Super Consumers Australia, an organisation committed to ensuring everyone gets a fair outcome from Australia’s $3 trillion superannuation industry.
The retirement system does much less to guide people through the complexity.
9 See Super Consumers Australia, ‘Submission to the Retirement Income Review’, February 2020, pp29-30. 10 Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 1: Overview, CEPAR research brief’, November 2018, p11. https://cepar.edu.au/ sites/default/files/retirement-income-in-australia-part1.pdf 11 Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 3: Private resources’, November 2018, p31.
It is open for debate whether the degree of flexibility (and the associated decision making that’s required of consumers) in the current decumulation system is the optimal approach.
DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account 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 making a decision 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.
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YourLifeChoices Retirement Affordability Index™ November 2020
A historic quarter for Australia’s economy
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he Consumer Price Index (CPI) fell 1.9 per cent in the June 2020 quarter, the largest quarterly fall in the 72-year history of the CPI and the first time annual deflation had been recorded since March 1998. All due, of course, to COVID-19. The fall was mainly due to free child care (-95.0 per cent), which was in response to the pandemic, a significant fall in the price of automotive fuel (-19.3 per cent) and a fall in preschool and primary education (-16.2 per cent), with free preschool being provided in New South Wales, Victoria and Queensland. If not for these three components, the CPI would have risen 0.1 per cent. Rents recorded their first quarterly fall on record (-1.3 per cent), while there was a record quarterly fall in household spending (-12.1 per cent).
Weekly expenditure for retirees aged 54+ Expenditure items Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure Food & non-alcoholic beverages As a percentage of expenditure Alcoholic beverages & tobacco products As a percentage of expenditure Clothing and footwear As a percentage of expenditure Household furnishings & equipment As a percentage of expenditure Household services & operation As a percentage of expenditure Medical & health care As a percentage of expenditure Transport As a percentage of expenditure Communication As a percentage of expenditure Recreation As a percentage of expenditure Education As a percentage of expenditure Personal care As a percentage of expenditure Miscellaneous goods & services As a percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure
Affluent Couples
Some CPI components recorded notable price rises on the back of increased spending. These included: cleaning and maintenance products (+6.2 per cent), other non-durable household products including toilet paper (+4.5 per cent), furniture (+3.8 per cent), major household appliances (+3.0 per cent) and audio, visual and computing equipment (+1.8 per cent). Inflation reached a six-year high of 2.2 per cent in the March quarter, attributed partly to the impact of drought and bushfires on food products. But the latest figures put the annual inflation rate for the year to the June quarter at -0.3 per cent. Single homeowners with private income experienced a 2 per cent drop in the cost of living, followed by couple and single homeowners receiving a full or part Age Pension (-1.9 per cent), couple homeowners with private income (-1.7 per cent) and renters receiving an Age Pension (-1.2 per cent).
Constrained Couples
Couple Couple homeowners homeowners with private on Age income Pension $182.23 $107.71 13% (+1%) 13% $44.62 $33.51 3% 4% $249.07 $175.42 17% 21% $55.85 $29.36 4% 4% $30.85 $17.51 2% 2% $74.28 $32.23 5% 4% $32.4 $22.92 2% (-1%) 3% (-1%) $149.03 $106.22 10% 13% $181.54 $117.85 13% 14% (-1%) $34.56 $24.49 2% 3% $293.73 $99.75 20% 12% $0.59 $0.22 0% 0% $30.05 $18.23 2% 2% $90.46 $48.78 6% 6% $1,449.25 $834.20 -$24.73* -$16.05* $6,280.09 $3,614.85 -$107.16* -$69.57* $75,361.10 $43,378.15 -$1,285.91* -$834.83*
*Percentage and dollar changes compared with March quarter figures
CashStrapped Couples Couple who rent on Age Pension $203.98 29% $35.38 5% $158.62 22% $47.64 7% $9.26 1% $19.61 3% $12.38 2% $36.78 5% $56.03 8% $26.51 4% $64.86 9% $0 0% $12.67 2% $24.4 3% $708.11 -$8.40* $3,068.46 -$36.41* $36,821.52 -$436.92*
Affluent Singles
Constrained Singles
CashStrapped Singles
Single Single Single who homeowner homeowner rents on Age with private on Age Pension income Pension $122.44 $90.37 $160.7 15% 20% (+1%) 36% $32.27 $28.89 $24.52 4% 6% 6% $125.13 $87.95 $78.82 15% 19% 18% (+1%) $29.00 $16.94 $23.53 4% (+1%) 4% 5% $20.52 $8.90 $7.34 2% 2% 2% $40.65 $18.87 $15.05 5% 4% 3% $29.23 $16.52 $8.78 4% (-1%) 4% (-1%) 2% (-1%) $85.57 $37.89 $22.42 10% 8% 5% $96.16 $49.04 $33.08 12% 11% 7% (-1%) $33.45 $17.27 $13.47 4% 4% 3% $136.81 $51.46 $31.06 17% (+1%) 11% 7% $0.13 $0.12 $0.01 0% 0% 0% $18.72 $9.87 $8.75 2% 2% 2% $54.91 $26.72 $16.65 7% (+1%) 6% 4% $824.99 $460.82 $444.18 -$17.05* -$9.20* -$5.50* $3,574.94 $1,996.89 $1,924.76 -$73.90* -$39.85* -$23.87* $42,899.23 $23,962.71 $23,097.13 -$886.85* -$478.85* -$286.39*
YourLifeChoices Retirement Affordability Index™ November 2020
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Government update YourLifeChoices keeps you up to date with changes that could affect your retirement. Support payments The third and fourth one-off Economic Support Payments of $250 will be made to eligible Australians from November 2020 and February 2021. The payments aim to provide financial support for age and disability pensioners, veterans, people on carer payments and family tax benefit recipients. Anyone eligible for a Commonwealth Seniors Health Card (CSHC) and Pensioner Concession Card (PCC) will also receive the payment, which will be paid into around five million recipients’ bank accounts. Check if you are eligible here.
Age Pension rates The twice-yearly indexation of the Age Pension is due to occur in March. The rates were left on hold in September due to a drop in the consumer price index as the nation continued to battle the economic impact of the coronavirus.
Super changes, in case you missed them The following changes to superannuation came into effect on 1 July 2020. Super funds must allow for portability of super and allow members to bring their own super funds to new jobs to prevent people accumulating funds and paying multiple sets of fees. The government will be monitoring and taking action against funds that are underperforming. Until June this year, super members aged 65 and 66 were unable to contribute to super unless they could prove they were working at least 40 hours over 30 consecutive days. A change on 1 July means those members can continue to put up to $25,000 into their retirement savings as a concessional contribution, or $100,000 as a non-concessional contribution. The extension in July of the Bring Forward Rule allows retirees aged 65 and 66 to make up to three years’ worth of voluntary after-tax (nonconcessional) contributions to their super, to a maximum of $300,000, as long as no additional after-tax contributions are made for two years following. The Bring Forward Rule lasts for five years and then expires. Super members with total balances of less than $500,000 will be able to carry forward their unused concessional cap amounts from 1 July 2018. 20
The age limit for receiving spouse contributions to super has been lifted from age 69 to 74. This means that a person can now keep making voluntary payments to their partner’s super until that person turns 74. The work test must be met prior to the spouse contributions being made to the fund. In the 2020 Federal Budget, the government announced it would create a new online comparison tool called YourSuper, which would rank funds by fees and returns.
Royal commission The Royal Commission into Aged Care Quality and Safety is due to hand down its final report in February. It has already concluded that the aged care system fails to meet the needs of its older, vulnerable, citizens. You can download a full list of its recommendations to date here.
Retirement Income Review The Retirement Income Review was handed to Treasury in late July but a government response is yet to be made and no date has been given for its release. Superannuation Minister Jane Hume says she has read the 650-page document.
YourLifeChoices Retirement Affordability Index™ November 2020
