Balancing retirement income risks
Generating the income for retirement from accumulated savings is a challenge that comes with additional risks to the retiree. This is why the Retirement Income Covenant will, from July 2022, require super funds to have a strategy for their members that aims to maximise retirement income, while managing these risks. Taking into consideration the wants and needs of members will be crucial for getting the balance right. A “comfortable retirement” means different things to different people and how confident Australians feel about achieving this goal and the risks they are willing to take varies widely.
Super funds will need to gather insights on their own members about retirement. Challenger has done research which provides some useful insights on how fund members feel about their retirement strategy, and in particular, their level of interest in a retirement solution that balances the risks in retirement. This might vary across funds but is intended to be a useful starting point for your consideration.
Maximising income makes sense as a financial goal. However, that isn’t necessarily how people think about financing retirement. Peer comparisons are common, and global measures often look at a replacement rate1 rather than an absolute level of income. This is because, to the retiree, sustaining a similar lifestyle in retirement is more important than trying to improve a lifestyle in retirement. One way to measure this is to consider what sort of lifestyle they expect in retirement.
A recent survey of over 3000 Australians aged over 45, found that only 40% expected to have a comfortable (or better) lifestyle in retirement. Sixty percent thought they would be meeting basic expenses with maybe a little extra. What is surprising about this variation is that it is not completely dependent on their level of savings. As can be seen in Figure 1, nearly one in five (18%) of those with less than $100,000 in super thought that they would have a comfortable lifestyle. In addition, 28% of those with more than $500,000 were expecting a lifestyle close to meeting their basic needs.
Figure 1: Expected lifestyle in retirement by super balance
There was also a trend concerning expected comfort and age. Older people were more likely to report an expected comfortable lifestyle in retirement. Only 35% of people under 55 expected a comfortable retirement, compared to 46% for those over 65. Partially this is related to wealth, older people have more savings. But those over 70 with less than $200,000 in savings, were more likely to describe their lifestyle as comfortable, than younger people with the same amount. The majority (54%) of those who said they were already retired considered their lifestyle to be comfortable.
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 That is, the income available in retirement expressed as a proportion of such income available during working years.