Retirement Affordability Index June 2019 by YourLifeChoices

ISSUE 10 JUNE 2019

Retirement Affordability Index

â&#x201E;˘

Making sense of retirement savings

How to make the most of what you have, so you can enjoy the best retirement possible www.yourlifechoices.com.au

You’ve got a lot of living to do in retirement. Are you confident you can pay for it?

The cost of living certainly isn’t getting any cheaper. By using part of your super or savings, add a Challenger lifetime annuity to your retirement income and you’ll enjoy guaranteed income for life that can keep pace with inflation. It can complement your other income sources, like your super and the Age Pension. So like thousands of other retirees, you too can look forward with confidence. To find out more, go to challenger.com.au or speak to your financial adviser. 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. 37544/0619

Contents

Published by: Indigo Arch Pty Ltd Publisher: Kaye Fallick Editor: Janelle Ward Copy Editor: Dairne John Writers: Matt Grudnoff, Sean Corbett, Camille Schmidt, Janelle Ward Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9885 4935 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 Indigo Arch Pty Ltd 2019

Funding your retirement Building your nest egg is just part of the journey. How to best use those savings is the challenge, writes Janelle Ward

What you told us YourLifeChoices’ retirement income surveys plus the tribes explained

The good and the bad news on costs How negative inflation affected your spending

Budgeting made easy With our budget planner, there are no excuses not to track your spending

The negatives about negative growth Chief economist with The Australia Institute, Matt Grudnoff, explains why living costs are not easing

Investing for retirement is different Challenger tells how to best secure your lifestyle when you call time on work

The sweet spot and super failings Economist Sean Corbett explores the sweet spot and says super is failing some baby boomers

Is your super fund the right one for you SuperRatings’ market insight manager Camille Schmidt tells how to ensure your fund is the best one for you

Do you know about these money-savers? Tips and tricks to help age pensioners make every dollar count

How to have a ‘good’ retirement Accumulating savings is just part of the puzzle, writes Janelle Ward. What about decumulation?

Government update What changed as we clicked over to a new financial year?

6 8 10 14 18

YourLifeChoices Retirement Affordability Index™ June 2019

How to make your savings sing Building your retirement nest egg is just part of the journey. How to best use those savings is the challenge, writes Janelle Ward. But what do you believe needs attention? The rate of the Age Pension, the ability to work without being penalised, the tax system, increasing super contributions – your list goes on. YourLifeChoices member Mogo51 says: “One area that needs urgent attention, is the current attitude towards age pensioners earning income and the ridiculously small amounts [currently allowed]. As well, where one member of a couple has retired on the pension and the other is still working. There needs to be a fairer assessment … to ensure the combined income is at least above the minimum wage level.”

n unknown ‘philosopher’ offered the following: “Retirement is wonderful if you have two essentials – much to live on and much to live for.” The June edition of the Retirement Affordability Index™, ‘Making sense of retirement savings’, explores that sentiment, for without savings a satisfying retirement is likely to be that much more difficult. We work, we save, we spend, we live and love and grow a superannuation fund. But then we must work out how to use those funds most effectively – to limit the fear that we will run out of money. Longevity can be a two-edged sword.

AutumnOz: “The most sensible solution would be an honest overhaul of the taxation system and making sure that everyone, including multinational companies, pays their fair share of tax.”

The most sensible solution would be an honest overhaul of the taxation system …

Almost 6000 members responded to YourLifeChoices 2018 Retirement Matters survey. They told us very clearly that there is much uncertainty in handling the nest egg. The complacency and trust that may have existed before the financial services royal commission certainly does not exist now. So what, if anything, is changing in the retirement income space? The Federal Government announced in May that it will review the entire retirement income system, including superannuation, pensions and taxation, as recommended by the Productivity Commission (PC) late last year. We await further details. 4

SuziJ: “First of all, increase all pensions – no matter which payment, be it Carer, Disability Support or the Age Pension. It's been suggested that a minimum (rise) of $75 per week for a single person and $100 per week for a couple.”

Fairplay: “Governments of all persuasions should remember that those who have already retired have done so knowing the prevailing rules at the time and, therefore, any changes must only affect those not yet retired …”

BTM: “Just goes to show how few people really understand superannuation and the important role it plays in post retirement life. Those who think that the base employer contribution will get them through are deluding themselves… Add to this the possible need for … aged care and you can see just how big a nest egg is required.” So how to spend the nest egg wisely, taking into account your expected longevity, the Age Pension and government allowances, your financial literacy and your reticence or otherwise to use a financial adviser? That’s the point of this edition of the Retirement Affordability Index™ – to explain some strategies or at least pose the questions that might prompt you to ask questions.

YourLifeChoices Retirement Affordability Index™ June 2019

What you told us Two recent YourLifeChoices surveys – 2019 Financial Security in Retirement and 2018 Retirement Matters – told us a lot about your hopes and fears, challenges and joys. The 3380 and 5969 respondents respectively painted a very real picture of the retirement landscape.

Do you believe your savings will provide an income for life?

Yes 24%

Yes

Unsure

No 44%

Which strategies do you use to make your money go further? Fewer holidays 55% Go only to doctors who bulk bill 49% Shop only at discount stores 41% Don’t eat out or buy takeaway food 40% Don’t use heating or cooling 17%

Unsure 32% How much in total savings do you believe you need for a comfortable retirement as a single?

$300,000+

$200,000-$300,000 18% $150,000-$200,000 13%

Would you borrow from the Government through a Pension Loan Scheme?

No 87%

Yes 13%

How do you receive most of your retirement income?

And as a couple?

57%

$600,000+

$500,000-$600,000 22% $400,000-$500,000 21%

Have you, or will you, consult a financial adviser about your retirement?

Yes 53%

No 47%

46% 34%

Account-based pension from superannuation

Centrelink payment

3% Rental property, Term deposits, Annuity

Retirement tribes explained Affluent Couples and Singles Homeowners with private income. Estimated annual expenditure $75,243 and $42,981 respectively. YourLifeChoices disclaimer

Constrained Couples and Singles Home-owners on full or part Age Pension. Estimated annual expenditure $43,305 and $23,980 respectively.

Cash-Strapped Couples and Singles Renters on Age Pension. Estimated annual expenditure $36,568 and $22,960 respectively.

YourLifeChoices Retirement Affordability Index™ June 2019

Negative inflation, but did your costs drop? Inflation continued to soften in the March quarter, with most tribes experiencing negative inflation.

the biggest falls in costs (couples -0.3 per cent and singles -0.2 per cent).

Four tribes – the Affluent and Constrained Couples and Singles – saw negative inflation, while two – the Cash-Strapped Couples and Singles – had zero inflation.

A cautionary point, however, is that while fuel costs went down compared with highs in the previous quarter, they were still expensive.

Negative inflation does not necessarily mean that prices affecting you went down, but rather that prices on average went down. You actually may have experienced an increase in the costs of some goods you purchased in the March quarter.

The spending categories that rose the most were vegetables (+7.7 per cent), secondary education (+4.2 per cent), motor vehicles (+2.4 per cent) and medical and hospital services (+1.3 per cent).

The low inflation numbers were driven by falls in the cost of automotive fuel (-8.7 per cent) and both domestic (-3.8 per cent) and overseas (-2.1 per cent) holidays, travel and accommodation.

How the cost-of-living changes in the March quarter affected you will depend on how you spend your money. If you spend a big proportion of your budget on travel, you may have noticed an easing in costs; if you spend a big proportion on food, you would have noticed a tightening.

The Affluent tribes are the most likely to spend more on travel and so are more likely to have enjoyed

The Australia Institute chief economist, Matt Grudnoff

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 6

Affluent Couples

Constrained Couples

Couple Couple homeowners homeowners with private on Age income Pension $181.87 $107.49 13% 13% $45.46 $34.14 3% 4% $240.04 $169.07 17% (+1%) 20% $53.72 $27.07 4% 3% $30.20 $17.14 2% 2% $72.18 $31.32 5% 4% $41.15 $29.11 3% 3% $145.09 $103.41 10% 12% $189.76 $123.19 13% 15% $36.26 $25.69 3% 3% $292.89 $99.46 20% 12% $0.60 $0.22 0% 0% $29.23 $17.74 2% 2% $88.54 $47.75 6% 6% $1,446.98 $832.80 -$3.44* -$0.35* $6,270.25 $3,608.78 -$14.90* -$1.53* $75,242.97 $43,305.35 -$178.80* -$18.35*

YourLifeChoices Retirement Affordability Index™ June 2019

CashStrapped Couples Couple who rent on Age Pension $203.58 29% $36.04 5% $152.87 22% (+1%) $43.85 6% $9.06 1% $19.05 3% $15.72 2% $35.81 5% $58.57 8% $27.80 4% $64.67 9% $0 0% $12.33 2% $23.88 3% $703.23 +$0.17* $3,047.35 +$0.76* $36,568.18 +$9.08*

Affluent Singles

Constrained Singles

CashStrapped Singles

Single Single Single who homeowner homeowner rents on Age with private on Age Pension income Pension $122.20 $90.19 $160.38 15% 20% 36% $32.88 $29.43 $24.98 4% 6% 6% $120.59 $84.76 $75.96 15% (+1%) 18% 17% $26.75 $15.29 $20.92 3% 3% 5% $20.09 $8.71 $7.19 2% 2% 2% $39.50 $18.34 $14.63 5% 4% 3% $37.12 $20.98 $11.15 4% 5% 3% $83.31 $36.89 $21.83 10% 8% 5% $100.52 $51.27 $34.58 12% 11% 8% $35.09 $18.11 $14.13 4% 4% 3% $136.42 $51.32 $30.97 17% 11% 7% $0.13 $0.12 $0.01 0% 0% 0% $18.21 $9.61 $8.51 2% 2% 2% $53.74 $26.15 $16.29 7% 6% 4% $826.54 $461.17 $441.53 -$1.76* -$0.40* -$0.13* $3,581.68 $1,998.39 $1,913.31 -$7.63* -$1.75* -$0.57* $42,980.13 $23,980.67 $22,959.72 -$91.59* -$21.06* -$6.79*

*Percentage and dollar changes compared with September figures

How does your spending compare? Expenditure items

Affluent Couples

Constrained Couples

CashStrapped Couples

Affluent Singles

Constrained Singles

Single Single Couple Couple Couple who homeowner homeowner homeowners homeowners rent on Age with private on Age with private on Age Pension income Pension income Pension

CashStrapped Singles Single who rents on Age Pension

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

YourLifeChoices Retirement Affordability Indexâ&#x201E;˘ June 2019

Inflation is low, yet living costs are rising. Here’s why We have record low wages growth and record low official interest rates, yet the cost of living is not getting any easier. Matt Grudnoff, chief economist with The Australia Institute, explains why.

ow can living costs be such an issue when the official measure of inflation, the Consumer Price Index (CPI), is so low? How can things be getting tougher when the Retirement Affordability Index™ for many tribes is negative? Cost of living is just one side of the coin. What people are facing is record low income growth that is not keeping up with prices. The cost of what you buy is only half the story. What people notice is not rising prices or rising incomes, but the difference between them. If incomes are rising faster than prices, then people are becoming better off. But if prices are rising faster than incomes, then people are worse off. When prices rise faster than incomes, economists call this falling real incomes. Your real income is the volume of goods you can purchase. If real incomes are falling, then you are able to buy less and less with what you earn. Since 2013, real incomes have been going down.

The latest check of the health of the economy showed that economic growth had slowed to 1.8 per cent. It has not been this low since the Global Financial Crisis of 2007-08 and was enough to spook the RBA to cut interest rates. This quarter’s Retirement Affordability Index™ has gone backwards for many tribes for the first time.

Negative inflation is an unusual concept. It basically means average prices are going down. But it doesn’t mean all prices are falling. Some prices are continuing to rise. What it does mean is that people in many of our retirement tribes are spending more of their income on items that are falling in “The bad news is that price than on items that are going since the end of the March up in price.

quarter, oil prices have risen and the Australian dollar has fallen.”

When people talk about cost-of-living pressures, they’re really talking about low income growth not necessarily rapidly rising prices. Slow wages growth and low inflation means smaller increases in the Age Pension. [The twice yearly indexation of the Age Pension is based on two factors: price increases and male weekly earnings. Payment rates are indexed to the rise in the CPI or the Pensioner and Beneficiary Living Cost Index (PBLCI), whichever is greater.] So if prices and wages are growing slowly, then growth in the Age Pension will also be slow. As a result, many retirees are dealing with sluggish incomes. This is exacerbated by the recent cut in interest rates because of the slowing economy. [The Reserve Bank of Australia (RBA) cut its official interest rate by 0.25 percentage points in June to a new record low of 1.25 per cent. It was the first change in the RBA's policy setting since August 8

2016, and more cuts in 2019 are expected.]

The important thing to remember is that these are average price changes and averages need to be approached with caution.

If your feet were in the oven and your head was in the freezer, your average temperature might be normal, but you’re unlikely to be comfortable. Let’s have a closer look at the categories that experienced price drops. Prices in a couple of key categories fell in the June quarter, mainly petrol and travel. Petrol has risen a lot over the past few years and, while it fell this quarter, it is still up on what it was at the start of 2016. So, while the fall in petrol prices is welcome relief, it certainly doesn’t mean petrol is cheap. And the bad news is that since the end of the March quarter, oil prices have risen and the Australian dollar has fallen, which means that the drop in petrol prices this quarter is unlikely to be sustained. The other big price drop was in domestic and overseas travel. This had the biggest impact on the Affluent tribes as they spend more of their income on travel.

YourLifeChoices Retirement Affordability Index™ June 2019

Affluent tribes saw their cost of living fall during the quarter, with couples experiencing a drop of 0.3 per cent and singles 0.2 per cent. Falling travel costs had a moderate effect on Constrained tribes, who saw their cost of living fall by 0.1 per cent for couples and singles. They had the least effect on the Cash-Strapped, whose cost of living was unchanged through the quarter.

A Canstar Blue survey of 5000 Australian adults found that one in four electricity customers struggles to pay the bill on time. But sleepless nights might be averted by a strategy known as bill smoothing.

Just because average prices are falling, it doesn’t mean that some categories aren’t going up in price. Medical services, for example, jumped in price. Other areas are a bit more hidden. Electricity fell during the quarter but, as with petrol, the fall came after large price increases in the past few years. Filling up at the pump is still expensive and the electricity bill still looks large, even if prices fell during the quarter. Even considering these categories, the cost of living for our retirement tribes over the longer term has been below the long-term average. In the past three-year period, the cost of living has gone up about four per cent. This is much less than the usual average of two or three per cent per year. However, with income growth so low, even four per cent over three years eats into the household budget. With a weakening economy and little sign that incomes are going to start growing much in the future, we can expect things to remain tough for the foreseeable future. YourLifeChoices disclaimer

How bill smoothing can help you

Financial comparison site Canstar describes bill smoothing as a way of paying smaller amounts more frequently, rather than paying one large bill a few times a year. Canstar explains that there are two ways of doing this: a formal payment plan with the service provider or informally making more frequent payments on your own. “With the formal bill smoothing structure, the provider creates a payment plan where you pay a portion of an estimated bill at regular intervals. It works by calculating the total estimated cost of your energy bills for the next 12 months and then splitting the amount into equal weekly, fortnightly or monthly payments,” Canstar says. If your actual usage is higher than your payments, you would receive an additional bill at the end of that quarter or year, or, if your usage is less than your payments, you would be “ahead” on your next bill. Canstar says many energy retailers have a formal bill smoothing structure, including: AGL, Click Energy, Diamond Energy, Power Direct, Origin Energy and Red Energy.

YourLifeChoices Retirement Affordability Index™ June 2019

Sponsored message from Challenger

Why investing for retirement is different

When you’re still employed and earning a salary, there’s money coming in that you can rely on. In retirement, in the absence of a regular salary, you’ll need to find a new way to secure enough income to cover your living costs.

2. Inflation

Why timing matters

Inflation is the increasing cost of living over time and represents an important and often underestimated risk to your financial security in retirement.

nvesting your money is one way to make the most of your savings and provide an income in retirement. But if you’re expecting savings and investment earnings to help cover your expenses, it’s important to get your strategy right.

financial plan early in your retirement so that you can work to protect your income now and in the future.

When accumulating super for retirement, you can Given your retirement could last 20-plus years, afford to be patient. With years ahead to top up your there's a good chance your savings and income will super, you can stay invested during falls in the share be affected by inflation. market and wait for markets – and your assets – to bounce back. For the few years just before and At an average annual inflation rate of 2.5 per cent, after retirement, it’s a different story. This period, a dollar today is worth roughly half what it was 25 known as the ‘retirement risk zone’, is the time years ago. Even this modest year-on-year rise in the when you have most to lose from a fall in the value price of goods and services can put you at risk of of investments. Your super has likely having an income that no longer reached its peak in value and you covers your living expenses from want to make the most of these Diversifying your year to year. savings for your future retirement investments – balancing 3. Market volatility income. growth and defensive Market volatility is a risk for In order to protect your savings and investors with exposure to provide you with income throughout assets for example – can investments such as shares, your retirement, it’s important to be limit the impact of market bonds and commodities. aware of three key risks. risks and inflation on If you’re worried about another 1. Living longer your retirement savings. potential market collapse similar Australians are living longer than to the Global Financial Crisis ever before. Life expectancy has (GFC) in 2008, you’re not alone. grown by more than 30 years in the last century1. A 2018 survey found that seven out of 10 older Living off retirement savings for 20 to 30 years or Australians share your concerns. more introduces the very real risk of running out Falls in the value of investments are impossible to of money. It’s no wonder then that 38 per cent of predict and can make a big difference to income Australians aged 50-plus are very worried about and financial security throughout your retirement. outliving their savings and another 33 per cent are concerned, according to YourLifeChoices’ 2019 When investments earn negative returns, your Ensuring Financial Security in Retirement survey. retirement savings are falling in value. Crucially, if you also need to make regular withdrawals to pay for We’re lucky that we live in a country where if your living expenses, it’s a twofold blow to your overall retirement savings run out, the Age Pension is there financial position in retirement. as a safety net. But those regular payments may not be enough to maintain the lifestyle you’ve been enjoying in retirement. You could also be left with limited funds and options for aged care, should you need it. That’s why it’s so important to make a 10

Fewer savings now means more potential for outliving those savings later in life. 1. Australian Bureau of Statistics, Life Expectancy improvements in Australia over the last 125 years, 18 October 2017

YourLifeChoices Retirement Affordability Index™ June 2019

What is sequencing risk? Another part of market volatility risk is sequencing risk. Sequencing risk is the risk that the order and timing of your investment returns are unfavourable, resulting in less money for retirement. For example, two people about to retire might have made identical super contributions and experienced average returns of eight per cent per annum over a 20-year period and yet have significantly different balances to retire on, all due to sequencing risk. Investment returns, good and bad, have more impact at some points in the superannuation life cycle than at others. The consequences of sequencing risk are potentially strongest around the point of retirement. If you have a run of poor market results close to retirement, it can really affect your retirement plan. Before you retire, you might be able to extend your working years to save a bit more. It is much harder to go back to work after you have retired. The good news is that there are ways to protect against the effects of sequencing risk. It can be a good idea to structure your cash flow needs around the time of your retirement to limit the risk that a poor sequence of investment returns impacts on your retirement goals.

Protecting your income and future in retirement Diversifying your investments – balancing growth and defensive assets for example – can limit the impact of market risks and inflation on your retirement savings. However, even with a well-diversified portfolio, your super and Age Pension may not provide you with enough income for your entire retirement. If you’d like the peace of mind that comes with a guaranteed income for life, a lifetime annuity might be right for you. Using a portion of your savings or super, you can invest in a lifetime annuity and receive regular, guaranteed income payments for life. An annuity can act as a safety net ensuring that you will receive income for life, regardless of how long you live or how investment markets perform. To find out more about the benefits of a lifetime annuity, and whether it might be right for you, talk to your financial adviser, visit challenger.com.au or call Challenger on 13 35 66. 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. Before making a decision about whether to acquire or continue to hold a financial product, you should obtain and consider the Product Disclosure Statement (PDS) for the relevant product. A copy of the relevant PDS for a Challenger product can be obtained from your financial adviser, by calling 13 35 66, or at www.challenger.com.au

YourLifeChoices Retirement Affordability Index™ June 2019

The sweet spot, super failings and where to next Economist Sean Corbett explains the sweet spot and why the superannuation system is failing some baby boomers.

wo years ago, after a new taper rate for the age pension assets test took effect, economist Sean Corbett wrote about the retirement income sweet spot, which looked at issues around balancing private retirement savings and assets with the Age Pension to achieve an optimal annual income. He revisits that issue, but over the longer term of the average retirement, and explains why the superannuation system is not yet delivering a comfortable retirement to all baby boomers.

Super has been compulsory since 1992, but it has failed many baby boomers The compulsory super system was designed to force people to save throughout their working lives in order to "provide an income in retirement to replace or supplement the Age Pension".

the rate at which Age Pension entitlements were reduced the more was saved in super, and increased taxation on retirement savings brought about by the introduction of the $1.6 million pension transfer balance limit, provided disincentives to save more super for retirement.

How should the Government adjust the Age Pension and the assets and income tests to permit a more comfortable retirement? The changes to the taper rate made in 2017 increased the rate at which the Age Pension is reduced if more assets are held, including assets in super, and exacerbates the disincentive to save more super or invest super more wisely to grow your super.

I would suggest that the rate at which the Age Pension is reduced under the assets test be changed back to the rate that applied before 2017.

For baby boomers (those born between 1946 and 1964), the system has not covered their full working lives (40 to 45 years) and started at only three per cent of wages compared to the current rate of 9.5 per cent with legislation in place to increase that to 12 per cent by 2025. Australians retiring now and over the next 20 or so years have not had a chance to accumulate the amounts the system was designed to deliver.

This shortfall in accumulated savings, coupled with increased longevity and current low interest rates on safer investments such as cash and fixed interest deposits â&#x20AC;&#x201C; which retirees tend to favour â&#x20AC;&#x201C; means that many baby boomers are finding it very hard to enjoy a comfortable retirement. Compounding this difficulty are tougher voluntary contribution limits that have been imposed in recent years, which make it much harder to contribute much more than the compulsory amount to super. Even if people wanted to find a way around these restrictions, the new taper rate, which increased 12

Until 2017, fortnightly age pension entitlements were reduced by $1.50 for every $1000 of assets above the threshold. The rate of reduction since 2017 has been doubled to $3.00. This has resulted in some very perverse outcomes across a wide range of super balances at retirement, stretching from around $400,000 to more than $1 million.

Before I look at the outcomes, I will put those retirement balances in perspective. Super savings of $400,000 can be expected to provide an income, which keeps up with inflation, of around $20,000 per annum, or about $400 a week, for around 26 years with the sort of conservative investment approach that most retirees favour. Super savings of $800,000 can be expected to provide an income, which keeps up with inflation, of around $40,000 per annum, or about $800 a week, for the same period of time. To put that timeframe in perspective, a person who is 65 now is expected to live, on average, for around 20 years if they are male and for more than 22 years if they are female. And that is the average, which

YourLifeChoices Retirement Affordability Indexâ&#x201E;˘ June 2019

means that 50 per cent will live for longer. And if emergencies such as medical expenses or the need to go into aged care force people to dip into their super savings, then they will either be forced onto a lower income from their super or their income from super will run out sooner. To add further perspective, if a person wanted to use his or her super savings to buy a retirement income for themselves and a partner – one that was guaranteed and equal to the couple's Age Pension – it would cost them around $1.2 million.

So is there a sweet spot? Going back to the outcomes of the 2017 changes, let us compare a person with $400,000 of super who initially withdraws $20,000 per annum and indexes it over time to keep up with inflation with someone who does the same thing but starts with $800,000 in super and initially withdraws $40,000 per annum and indexes it over time.

However, it will not be until the 20th year that the person who starts with $800,000 of super will reach a point where their income exceeds that of the person who started with $400,000 by $20,000 – the amount equal to the additional $20,000 they withdraw from their super every year. This only occurs once their super balance falls low enough so that they qualify for the full Age Pension. If you look at the total income each person received during the first 25 years of retirement, the person who started with $800,000 of super will only receive an extra $242,000 of income compared with the person who started with $400,000 of super. This means that only 60 per cent of the additional $400,000 of super they started with will be returned to them as additional income over the first 25 years of retirement. I would suggest that the rate at which the Age Pension is reduced under the assets test be changed back to the rate that applied before 2017. If that were done, the person who started with $800,000 of super in the example above would not live on a lower income compared to the person who started with $400,000 of super in any year of retirement. In addition, they would receive back 84 per cent ($334,000) of their additional super savings as extra income during the first 25 years of retirement.

Both are aiming to make their super last for 26 years, which provides a small buffer above the average time that they are expected to live. I should mention that the outcomes below are based on Age Pension rates and thresholds that applied at the time the rate changes were introduced in 2017. Using more recent rates and thresholds would marginally change the numbers, but would not change the overall results, so I have not updated the rates and thresholds.

Sean Corbett has had more than 25 years’ experience in the Australian superannuation industry, principally in the areas of product management and product development with a focus on retirement income products.

The results are for a person who is part of a couple who own their home and have no other assets other than super. I have made a number of reasonable assumptions about such things as wage growth.

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.

Weirdly, one of the outcomes is that the total income (Age Pension and income from super) will actually be higher for the person with $400,000 of super than for the person with $800,000 of super during the first six years of retirement. And it will be more than $10,000 higher in the first year ($52,625 versus $42,336). In year seven, the person with $800,000 of super will enjoy around the same income as the person with $400,000 of super, after which the person with $800,000 of super will progressively enjoy a higher and higher amount of total income.

YourLifeChoices Retirement Affordability Index™ June 2019

How to ensure your super fund is the right one for you There’s no room for complacency when it comes to the performance of your super and pension funds. SuperRatings’ market insight manager Camille Schmidt tells how to ensure your fund is the best one for you.

t has been an eventful year for superannuation, with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry shining the spotlight on the industry. We are seeing the big banks sell off their wealth management arms and a number of super funds have announced mergers. The Government also released its Protecting Your Super package, and some of the changes have come into effect, mainly relating to fees and insurance.

metrics, you can visit the SuperRatings Top 10 site. However, to get a deeper understanding of an individual fund’s value, nonmonetary aspects are also important, such as the type of advice services available, member education initiatives, an easy-to-use website, and whether you can contact customer service quickly and easily.

In assessing a fund’s offering, we look at more than 300 individual characteristics, with our approach recognised as one of the most detailed in Australia. In 2018, we reviewed more than 430 superannuation and 180 pension products to identify those offering the best value for money for members, and we’re excited to share with you some insights into our approach.

isn’t performing well. But we can’t emphasise enough that longer-term performance is what you need to look at.

When we analyse pension products, we also look at the flexibility offered to members in accessing their money. For example, can they choose the There is a sense of change in the air. While it is payment date that suits them? Can they choose to uncertain where the industry will land at this point, have their pension payments automatically increase we believe there are some key with inflation? Is it easy to update areas that members can look at to beneficiaries? We believe funds determine whether they’re in a good Switching funds when the should strive to be seen as easy fund … or whether it’s time for a to deal with by their members, market gets the jitters change. particularly for those members can put you in a worse entering retirement and drawing What should you look for? down on their retirement funds. position than if you had SuperRatings is a leading Access to advice services in the made it through the superannuation research house lead up to and during retirement that has reviewed superannuation is also an important feature to bumpy ride … products for many years. Our provide members with peace of mission is to close the information mind. divide between super funds and their members, and create a strong superannuation industry that Long-term performance is key benefits all Australians. Researching and comparing We believe long-term performance is vital. Having a superannuation products can seem overwhelming, good track record of performance over seven to 10 but we believe there are some key areas you can years indicates that a fund is a consistent performer. look at to identify those funds that offer the best When markets go up and down it can be unsettling, value for money. and you may think you should switch if your fund

Traditionally, funds are assessed based on investments and fees, as well as insurance. For a simple way to track performance for these 14

Switching funds when the market gets the jitters can put you in a worse position than if you had made it through the bumpy ride, particularly if you are retired and drawing down on your investment. In saying that, past performance is not an indicator of future performance, so we also look at a fund’s investment process, including whether they have the right people in place and a robust investment strategy.

YourLifeChoices Retirement Affordability Index™ June 2019

There are also many different types of investment options out there, so it is important you review the level of risk involved and whether it suits both your tolerance and the stage in your life i.e. whether you are nearing retirement or already in retirement.Capital stable and conservative balanced options have lower exposure to growth assets such as Australian and global shares, whereas balanced and growth options have higher allocations to these markets. Pension return benchmarks – balanced options 3 Years FYTD Top quartile 6.4% 10.2% Median 5.9% 9.4% Bottom quartile 5.1% 8.4%

5 Years 9.0% 8.2% 7.2%

7 Years 10.4% 9.7% 8.7%

10 Years 9.9% 9.5% 8.8%

* As at 30 April 2019. Based on SuperRatings’ SRP50 Balanced (60-76) Index containing pension options with growth asset ratios of 60% to 76% * FYTD indicates financial year to date return. * Returns are net of investment fees, tax and implicit asset-based administration fees. Annualised returns for each period are shown.

Accumulation return benchmarks – balanced options 3 Years FYTD Top quartile 5.7% 9.5% Median 5.0% 8.5% Bottom quartile 4.3% 8.1%

5 Years 8.3% 7.7% 7.0%

7 Years 9.3% 8.9% 8.4%

10 Years 9.0% 8.6% 8.3%

* As at 30 April 2019. Based on SuperRatings’ SR50 Balanced (60-76) Index containing Balanced options with growth asset ratios of 60% to 76% * FYTD indicates financial year to date return. * Returns are net of investment fees, tax and implicit asset-based administration fees. Annualised returns for each period are shown.

How much should you pay? A one per cent difference in fees charged over 30 years could result in a difference in your super balance of up to 20 per cent, so it’s important to look at the amount you pay. To help with this, SuperRatings analyses fees across super and pension products to provide some benchmarks to use. The top quartile

indicates the cheapest funds, the bottom quartile is the cut off for the more expensive funds, and the median represents funds that sit between cheap and expensive in terms of fees. This table summarises fee benchmarks for balanced options across the main pension products in the market, using an account balance of $250,000. >>

Pension fees on a $250K account balance – balanced options Fee as a % of Annual Member Percentage-based $250K balance total fee administration fee Top quartile 1.0% $2532 $0 0.17% Median 1.2% $3010 $71 0.30% Bottom quartile 1.6% $3950 $98 0.61%

Investment related fees and costs 0.69% 0.85% 1.04%

*Fees used in the analysis are as at 31 March 2019 using most recent data available to SuperRatings at the time of preparation. Fees include percentage-based administration fees, member fees, investment management fees (incl. performance-based fees), indirect cost ratios (ICRs) and taxes, but exclude any applicable employer rebates.

YourLifeChoices Retirement Affordability Index™ June 2019

Accumulation fees on a $50K account balance – balanced options

Fee as a % of $50K balance

Total

Member Percentage-based fee administration fee

Investment related fees and costs

Top quartile Median Bottom quartile

1.1% 1.2% 1.6%

$527 $615 $818

$53 $78 $91

0.66% 0.83% 1.01%

0.10% 0.25% 0.56%

This table above summarises fee benchmarks for balanced options across the main pension products in the market, using an account balance of $250,000.

Advice services There is a wealth of information available on fund websites on topics such as budgeting, selecting investment options, risk, retirement, the impact of the Age Pension and aged care. Check your fund’s website to see what information it provides online. Seminar programs are also a good source of information on topics ranging from investments to retirement planning. Contact your fund if you wish to find out more information and/or arrange a consultation with an adviser.

Time for a health check

Government’s MoneySmart website may assist in finding a financial adviser who could provide a specific fund recommendation for you, if this is of interest. If you decide you want to switch superannuation providers, this is a relatively straightforward process. From 1 July 2019 exit fees were banned, so if you do decide to leave your fund, you will no longer be charged. You can contact the fund you wish to move to and obtain a rollover form (these are often available on funds’ websites). Most funds also perform rollovers over the phone or online. You can also use the MyGov website to create an account by using this link and clicking on the ‘Super’ tab.

The end of the financial year is the perfect time to check the health of your super or pension fund and make sure you are on track.

Funds are making it easier for members to monitor, switch and engage with their super, so don’t put it off – your future self will appreciate that you took the time.

If you would like to have a chat, we suggest talking to your fund or an adviser who you trust to make sure your super is fighting fit for the future. The ‘choosing a financial adviser’ section of the

YourLifeChoices Retirement Affordability Index™ June 2019

Allowances and discounts you should know about How can age pensioners ensure they are making every dollar count and enjoying the best retirement possible? These tips will help.

• Age Pension • Bereavement Allowance • Carer Payment •D isability Support Pension • Newstart Allowance • Parenting Payment.

Payment and Service Finder

You’re also eligible if you’re aged over 60 and have been receiving any of the following allowances for more than nine months:

t can be tough making ends meet when you’re renting on an Age Pension, so here are some of the many ways you can save, find discounts or enjoy free activities.

At the top of the list is Centrelink’s Payment and Service Finder. It helps you to find, estimate and compare payments and services for which you may be eligible. You should be taking advantage of all allowances you’re entitled to, and the finder is a great way to work through what’s on offer.

Commonwealth Seniors Health Card The Commonwealth Seniors Health Card is a valuable resource. Provided by the Australian Department of Human Services, it offers older Australians access to cheaper prescription medicines, government medical services and other federal concessions, including travel discounts, and may deliver discounted gas, electricity and water rates. To qualify for the Seniors Health Card, you need to have reached age pension age, have a tax file number (TFN) or a valid reason for not having one, be an Australian resident and earn no more than $54,929 per annum for singles or $87,884 combined per annum for couples.

Another card from the Australian Government, the Pensioner Concession Card, provides some health concessions and access to other discounts. You may be able to get a Pensioner Concession Card if you receive any of the following benefits: YourLifeChoices disclaimer

The Pensioner Concession Card entitles you to reduced-price medicines under the Pharmaceutical Benefits Scheme (PBS). You may also be eligible for other concessions, including: • bulk billing for doctor's appointments (at your doctor's discretion) • refunds for medical expenses through the Medicare Safety Net • assistance with hearing services • discounted mail redirection through Australia Post. Depending on your state or territory, you might also be entitled to:

According to finder.com.au, the card can also help you obtain discounts on: • rail travel, including on Great Southern Rail services, such as the Indian Pacific, the Ghan and the Overland • out-of-hospital medical expenses through the Medicare Safety Net • health, household, transport and education concessions, as offered by different businesses and retailers in each state.

Pensioner Concession Card

• Newstart Allowance • Partner Allowance • Sickness Allowance • Special Benefit • Widow Allowance.

• reduced property or water rates • reduced energy bills • reduced fares on public transport • reduced cost of motor vehicle registration • free rail journeys. Many private businesses offer discounts for seniors, although some don’t advertise that fact too widely. It’s always worth asking in every store you visit. In Victoria, the Seniors Business Discount Card provides holders with access to discounted goods and services from more than 4000 Victorian Seniors Card businesses. You might also consider: • house-sitting • sharing accommodation with friends • living in a cheaper overseas country • hitting the gig economy and earning extra dollars through such sites as Mad Paws, Airtasker, Uber, Uber Eats and Freelancer.

YourLifeChoices Retirement Affordability Index™ June 2019

The missing link – how best to use the retirement nest egg Accumulating retirement savings is just one part of the puzzle, writes Janelle Ward. Making sense of them and using them to maximum advantage is the next key challenge.

he Macquarie Dictionary definition of decumulation is “to reduce (one's assets, as savings, investments, etc.)”. According to YourLifeChoices member GeorgeM: “Decumulation is the process of deploying your savings to fund your retirement. In other words, it’s a technical word for how to take your hard-earned super savings away from you so that you leave behind next to nothing for your heirs!” For YourLifeChoices’ 230,000 members, decumulation is a very important word. Accumulating retirement savings is only one part of the puzzle. Making sense of savings and using them to maximum advantage is the next key challenge.

of retirement income. That left the average male with a gap of 9.9 years and women, who live longer, with a 12.6-year gap that would need to be covered by the Age Pension. Report co-author and head of institutional investors at the WEF Han Yik said: “The size of the gap is such that it requires action from policymakers, employers and individuals. Unless more is done soon, retirees will have no choice but to tighten their belts and preretirees will need to postpone retirement. You either spend less or you make more.” Figure 12: Expected proportion of retirement income by source 95

Retirement Savings Deficit - Years Saved vs Life Expectancy

Women

But, of course, retirement is not just about the money. The World Economic Forum (WEF) said in its white paper, Investing in (and for) Our Future, that accumulating wealth during working years was not, by itself, a means to a good retirement. The WEF’s June report acknowledged that a good retirement was linked to health and the fulfillment of any ambitions, such as spending more time with family, cultivating hobbies, travelling and doing community work. But, health aside, the size of the nest egg will have a big bearing on the breadth of retirement objectives. As will that word ‘longevity’, which both delights and daunts. The report concluded that retirement account balances were not increasing sufficiently and that many retirees around the world would outlive their savings by as much as a decade or more. It did not take into account countries’ pension schemes. In Australia, the WEF calculated that 65-year-olds, on average, had enough savings to cover 9.7 years 18

Women

Women Men

Women

Women Men

Men

Men Life Expectancy Past Savings

80 Age

Superannuation has been compulsory in Australia since 1992, but that leaves many baby boomers (those born between 1946 and 1964) with less than a complete working life of contributions. The nest egg, whatever its size, needs to be handled with care.

70 Average Savings

65 USA

Netherlands

Australia

Canada

Japan

Source: World Economic Forum Analysis

The report also stressed the need for decumulation strategies to be flexible. In its global comparison, the WEF gave Australia a tick of approval for addressing the topic of decumulation. It said: “The Australian retirement system, dominated by superannuation, is one of the most well-developed from an accumulation perspective, with high levels of coverage, mandated levels of savings and strong investment architecture. “However, the Government has stated that the retirement phase is underdeveloped and so is working on bringing forward a retirement income framework with the objective of putting in place Comprehensive Income Products for Retirement (CIPRs). CIPRs will have to provide:

YourLifeChoices Retirement Affordability Index™ June 2019

• efficient, broadly constant income • longevity risk management (income for life) • some access to capital.” The WEF warned that while knowledge, or “financial literacy”, should allow retirees and pre-retirees to be able to rationally evaluate different decumulation products and determine their own decumulation strategy, the array of products and services might be overwhelming for many. “Several studies/research papers have found that when faced with the complexity of the retirement landscape, people were prone to ‘switch off’ and defer decision-making or simply chose the path of least resistance,” it said. “While providing financial education should be an aim of both governments and employers (particularly for employers, given the trust that individuals have with their employers – 79 per cent of adults trust their employer to give sound, independent advice), there needs to be further consideration on how to approach decumulation at the societal level.” The WEF places great value on financial advisers, but in the wake of Australia’s financial services royal commission, rebuilding trust in the sector is an ongoing goal. The report says that because every decumulation strategy will be different due to personal circumstances, access to advisers who can help guide and potentially implement decisions “will be vital”. “A recent study in the UK found that ‘those who take advice are likely to accumulate more financial and pension wealth, supported by increased saving and investing in equity assets, while those in retirement are likely to have more income, particularly at older ages’.” The WEF acknowledged that the use of roboadvisers, which could be offered at a fraction of the cost of human advice, will grow, though speaking to a human financial adviser, particularly at key life stages, will continue to have appeal and value – “albeit with a set of strict competency standards and delivered at a cost-effective and transparent price”.

Grattan Institute fellow Brendan Coates said a review was long overdue. “We need to work out the target for an adequate retirement income and what the trade-off should be between living standards while working versus in retirement,” he said. “We still haven't worked out what the purpose of the system is and how the different parts of it work together …” In a new set of research briefs from the ARC Centre of Excellence in Population Ageing Research (CEPAR), lead author and senior research fellow Rafal Chomik said: “Much thought has gone into accumulating superannuation, less into its decumulation. “Australia is the only OECD country that has a mandated pre-funded accumulation structure without a mandated decumulation structure. “… how Australians spend their super is set to change in the next few years. A policy framework is under development to require fund trustees to offer risk-pooling products to members.

The report stressed that the ability to be able to respond to significant events was important.

“For the superannuation sector, this could be a new opportunity. For government, it comes with concerns that the inefficiencies that have plagued the accumulation phase could also translate to inefficiencies in the retirement product market.”

“People tend to separate their money into different categories for various purposes, e.g. emergency cash pots or vacation savings. It is important that any decumulation strategy be responsive to how people intend to manage their finances.

CEPAR chief investigator Michael Sherris a professor of actuarial studies at the University of NSW, said that individual companies did not generally turn superannuation assets into retirement income products, leaving retirement risks with consumers.

In May, the Australian Government promised a review of the entire retirement income system, including superannuation, pensions and taxation, as recommended by the Productivity Commission (PC) late last year. Details are yet to be provided, but CIPRs are expected to be an important component.

Retirees receiving private income streams tended to rely on phased withdrawals, with no cover against longevity, investment and inflation risk, he said.

YourLifeChoices disclaimer

Professor Sherris also noted that the subject of super decumulation was a “live debate”.

YourLifeChoices Retirement Affordability Index™ June 2019

Government update YourLifeChoices keeps you up to date with retirement income changes.

number of changes that might affect retirees and pre-retirees came into effect on 1 July.

Age Pension Age The pension age increased to 66 years from 1 July. It will increase further in upcoming years – to 66½ years from 1 July 2021 and to 67 years from 1 July 2023.

Age Pension income and asset test changes Revised income and assets test thresholds took effect from 1 July. The new disqualifying income limit for singles is $2026.40 (up from $2024); couples combined $3100.40 (up from $3096.40); illness-separated couples combined $4012.80 (up from $4008.80). The new disqualifying asset limits for single homeowners are $572,000 (up from $567,250); single non-homeowners $782,500 (up from $774,250); couple combined homeowners $860,000 (up from $853,000); couple combined non-homeowners $1,070,500 (up from $1,060,000).

Work Bonus Since 1 July, both employed and self-employed pensioners over the age pension age and Veterans’ Affairs pension recipients over the qualifying age are able to earn up to $300 a fortnight through work before this income is assessed by the pension income test. The maximum Work Bonus accrual amount increased from $6500 to $7800. The Work Bonus was set at $250 when the scheme was introduced in 2011 and had not been changed since then.

Pension Loans Scheme The Pension Loans Scheme (PLS) was expanded on 1 July, with the available fortnightly loan plus pension amount increasing to 150 per cent of the maximum rate of fortnightly Age Pension.

Lifetime income products New means-testing rules were introduced by the Department of Human Services (DHS) on 1 July to assess lifetime income stream (LIS) products. The following rules apply to products bought from 1 July 2019: 20

• an income test will assess a fixed 60 per cent of all product payments as income • an assets test will assess 60 per cent of the nominal purchase price until the life expectancy of a 65-year-old male (currently age 84) – or a minimum of five years – and then 30 per cent for the rest of the person’s life.

Superannuation accounts New laws took effect on 1 July, requiring super funds to report and pay inactive low-balance accounts to the Australian Tax Office (ATO). This change was in accordance with new Protecting Your Super legislation, which was designed to ensure that people with multiple accounts were protected from having their total super balance eroded by fees and insurance premiums charged by each superannuation provider. Insurance premiums associated with inactive accounts have been or will be cancelled after 1 July. In addition, fees are now capped at 3 per cent per annum for accounts with $6000 or less at the end of the financial year and fund members can switch super funds without paying a penalty as exit fees are banned.

Tax time Tax returns completed by individuals need to be lodged by 31 October, or later if completed by a registered tax agent. To work out whether you need to complete a tax return, visit the Australian Tax Office.

YourLifeChoices Retirement Affordability Index™ June 2019

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