Remember Easter 2022 when passengers were in long queues at capital city airports, waiting hours for flights, some of which were cancelled?
And the reward for their inconvenience and patience? They were slammed as not ‘match fit’ by then Qantas CEO, Alan Joyce.
Well, we know how that ended, don’t we? Those passengers were match fit, but the airlines had quite a few issues that needed sorting. The service that passengers were paying for just wasn’t up to scratch.
This analogy comes to mind during the current ‘super wars’. The current debates have been further heightened by a call for submissions to the Treasury Discussion Paper, Retirement phase of superannuation. Many submissions have found their way into media releases which have been duly reported across our media. The statements vary, but underneath many of the claims, is a subtext that retirees are somehow … again … at fault.
This time it’s for underspending. It seems, like airline passengers, retirees just aren’t match fit. Which must make the average retiree’s blood boil!
That’s because, for the past 30 or so years (since compulsory super was introduced), they have been told by the banks and super funds to save, save, save their money in super. They were led to believe that a ‘comfortable’ couple’s retirement required a fully paid-off home and about a million dollars in savings. And that socking money into their ‘nest egg’, then preserving it at all costs was their primary mission.
Evidence suggests that many retirees have responded to this exhortation by making minimum withdrawals from their super accounts, leaving large balances for their families to enjoy after they’ve departed. But now we see industry exhorting retirees to get over their so-called ‘frugality’ and start to spend, spend, spend. No wonder many retirees are so ‘disengaged’ as industry politely terms it. That’s an understatement.
How did we get here?
How can we reframe the discussion in a way that supports retirees?
Here’s a brief backgrounder and some starting thoughts on how we can help retirees to smooth their income across their two- or three-decade long retirements.
The rise of the ‘nest egg’
Back in the early days of super in the 1990s, the advice within the retirement income industry was largely driven by major insurance companies: NRMA, AMP, MLC and AXA to name a few. Their advertising campaigns sold retirees on a goal of super large nest eggs – literally – with images of golden eggs in golden baskets. The industry then had a robust army of financial planners who took commissions and managed these ‘nest eggs’.
The heyday of commissioned planners did not last, and the Royal Commission into banking and finance, which reported in 2019, largely shut the door on this planning and saving model.
But somehow these persistent images of nest eggs and piggy banks became code for retirement savings. Sitting beneath this was a strong message based on fear and guilt:
- You won’t have enough
- You need to save harder
- If you don’t reach the $1 million target, you’ll have a miserable retirement
And these subliminal messages die hard.
To be fair, a quiet revolution has taken place since the early days of compulsory super.
Many planner conflicts have now been removed or modified. Industry funds have gained strength (some might say too much). Today they are behemoths, but their core proposition that ‘From little things big things grow’ is a much more realistic strategy for most retirees when compared to forceful suggestions that you’ll need a million to live a decent retirement.
The question is, how could an entire industry push ordinary Australians to save, save, save, without an eye on the day when this clearly discernible demographic spike of baby boomers would quickly reach Preservation Age?
And how could the financial services industry be seemingly unaware that the constant ‘save for your nest egg’ refrain would become so ingrained and self-defeating?
And that retirees with modest means can’t simply flip a switch at age 60, 65 or 70 and embrace a spending mode?
How to turn on the tap
What are the answers to encouraging reasonable spending patterns in retirement? In short, how does government now ask retirees to turn on the tap of spending their super?
There are a few issues to tackle here but the first has to be to agree on the facts. Until now there seemed to be general agreement that retirees were underspending. But in more recent times we’ve been told retirees spend all they have!
The first important fact is that compulsory super did not start until 1992, and then it was at 3% of income, not increasing to 9% until 2007. As a consequence, retiring Australians will not have received the benefit of a meaningful super contribution over the 40 years of their working life until the mid-2040s. So for most older Australians and current retirees super savings tend to be modest, if they have any at all. As the Productivity Commission found in 2019 around 20% of workers have no super at Preservation Age and then only around 40% still have super when eligible for the Age Pension. Those with smaller balances will often take a lump sum to pay off debts, undertake a renovation or purchase a new car or white goods in preparation for retirement. So it’s unsurprising that many current retirees have no super when they die.
This view of super spending, that retirees are inclined to spend themselves out, is reflected in recent reports from Association of Super Funds Australia (ASFA) and the newly convened Super Members Council (SMC).
However, as the RIR found in 2020 those fortunate enough to have enjoyed a more substantial rate of super savings over their working lives tend to die with most of their savings intact. By adhering to minimum drawdown levels, superannuants tend to underspend in retirement – spending the income rather than the capital they have put aside all their working lives to provide a good standard of living in retirement, Consequently, they are leaving what is often an unintended bequest to future generations.
Apart from moderating language about saving, there are other ways to encourage retirees to more efficiently access their savings.
Providing support to better understand key triggers and decision-making points in their retirement journeys makes a lot of sense. This means financial literacy support through basic explainers of key rules including Age Pension entitlements, preservation age, retirement income streams, account-based pensions, even MySuper options. When you are in an industry long enough you start to accept jargon that is confusing and meaningless to the broader population. But everyday retirees need more help here. This is a big shout out to the Federal Government in particular which has been missing in action on the need for retirement financial literacy support across the 30+ years of mandated super.
Understanding that your savings continue to grow while you draw a retirement income stream also helps. If a single female has, say, the median amount in super (female, $204,000) and withdraws a pension top up of $1200 a month, then the balance at the end of her first year will be $204,000 - $14,400 = $189,600. But when we apply a conservative 7% earnings to the balance (last year balanced funds delivered 9.6% according to SuperRatings) then the balance at the end of the period would be at least $202,872, so the withdrawals are largely mitigated. If this retiree wanted more money for renovations or lifestyle requirements, she might have confidence to access her funds, knowing that she is not in danger of running out.
It's not just what we say, it’s also how we say it
Much of the old school retirement saving/spending discourse has had a hectoring tone. You must save more. You’ll run out. Here’s an impossible target for savings, but you’re on your own when it comes to getting there.
This tone persists in the chiding of retirees for being too frugal. ‘They’ are not spending enough, the headlines admonish. ‘They’ are passing on wealth to the next generation instead. ‘They’ haven’t put enough aside for aged care. And then there’s the suggested rainy day money target of three months’ salary…
These are impossible targets for many retirees. For most, in fact.
They have led to a predictable response, ‘Don’t keep telling me what to do, show me my potential strategies instead…’
Stepping through the options
Is it time to give retirees a break from jargon and step them through their options in a more positive manner? One suggestion is for funds to give individual members a retirement income projection from day one so that they anticipate getting the super back in terms of an income. Not just a bundle of savings.
There are many other ways of helping retirees to help themselves without berating them, for starters, by providing relevant and timely information and guidance. So as older Australians join the queue for the long-haul journey of retirement income management, let’s stop telling them that they’re not match fit for not spending quickly enough. Instead let’s scrutinise what industry and government are doing to support them to get on board in the most effective way.
Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.