How to deal with worries about having enough to fund your retirement
Taking action now will ensure you have the retirement you want. Photo: Getty
Many people look forward to retirement in the latter days of their working lives, but new research has found the great majority don’t feel they are financially ready.
A report done by research group Capital Preferences for financial house Challenger found that 78 per cent of those aged 55 to 74 and not fully retired didn’t feel ready for the financial challenge of stopping work.
And the concern was not directly linked to their salary, age or super balance.
The main concerns were “the fear that people might outlive their savings or the fear that inflation might erode the value of their nest egg,” said Pat Spenner, marketing and strategy head with Capital Preferences.
There was also a fear of the costs of an unexpected health emergency, Spenner said.
The inflation fear was particularly strong at the moment because of the inflationary period experienced over the past 2.5 years which reached a peak of 7.8 per cent in December 2022.
However the CPI fell back to 4.1 per cent a year later.
Dealing with retirement fears
There are a number of ways in which people can cope with a rising cost of living in the run up to retirement.
An important one is to work on a part-time basis for longer.
The government is encouraging this by allowing age pensioners to utilise the work bonus.
It allows a person on a full or part pension to earn up to $300 per fortnight from paid employment without affecting the pension income test. It is available to both members of a couple.
An attractive feature is that it also allows the banking of up to $11,800 against future earnings, a figure that has no carry-forward time limit.
If you are of pension age but not yet drawing a pension then you can build a $4000 work bonus balance to carry forward once you start to receive a pension.
All this means anyone on a part pension can boost their retirement income without drawing down more from their superannuation account.
Guaranteed income products
Another useful way of giving yourself more security in retirement is to buy a guaranteed income product or annuity.
These guarantee an income for life or a set period.
Some can be indexed to inflation and some are market linked. That means their returns and value will fluctuate with the market.
There are some distinct advantages to guaranteed income products.
One obviously is that you know how much you will have to live on into the future without having to draw down too much on superannuation if markets fall.
Annuities can be a valuable backstop for retirement income who may spend their retirement savings early or are hit with an unexpected event.
They can also be used to guarantee the income of a widowed partner who may not be adept at managing their finances.
“What people often look to do is to add [a guaranteed income product] to the age pension,” said Aaron Minney, income research chief with Challenger.
A buffer of $7000 a year could be very attractive to someone likely to spend their super.
“There is a massive difference in lifestyle for someone who is earning $35,000 a year compared to $28,000 on the age pension,” Minney said.
“A big advantage with annuities is that they can improve your outcomes with Centrelink,” said Wayne Leggett, director with Paramount Financial.
“Generally speaking if you buy an annuity, only 60 per cent of it counts under Centrelink’s income test,” Leggett said.
That is a distinct advantage for those whose asset level will either reduce or block their entitlement to an age pension because only 60 per cent of the annuity value will be counted as an asset.
Guaranteed lifetime income (GLI) products appear to be under-utilised by investors.
Capital Preferences found that 55- to 74-year-olds had $1230 billion in super balances. However only $43 billion, or 3.5 per cent of this is invested in GLI products.
Given the responses to the group’s survey on income certainty preferences in retirement, Capital Preferences concludes that $188 billion of those super balances could be invested in GLI products.
That represents a $145 billion gap between current and potential investments.
That gap represents retirement savings of people who have told Capital Preferences “they’re willing to settle for a lower expected income but they want to be able to rely on that income for as long as they live,” Spenner said.
The question for those buying a guaranteed income product is ‘How much should I put in?’
“Most people don’t put everything in and the amount they put in is often determined by what suits their Centrelink position,” Leggett said.
If you are looking for a guaranteed income product, or annuity, you need to determine which variety you want.
There are fixed-term annuities along with lifetime products.
There are those offering inflation-linked returns and some also offer market-linked products.
Major suppliers are Challenger, Resolution Life and UniSuper.
Super funds have been told to deal with longevity risk and some already have offerings in the market-linked space.
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