Tackling the FORO (fear of running out of money) … Why this won’t happen

Part 3: This is the third column in our five-part-series ‘Road to Retirement’ designed to help you plan for the future and be retire-ready
There’s no need to worry about running short in retirement.

There’s no need to worry about running short in retirement. Photo: Getty

The fear of running out of money in retirement is the biggest concern held by Australian retirees.

It’s so concerning, it has become an acronym – the FORO!

It’s only natural that many pre-retirees feel concerned about their money lasting as long as they will. But the good news is that such worries are based on false assumptions.

Most people’s retirement income is not one thing nor another, it’s a combination of different sources of income. And there are two main reasons why you won’t actually run out.

There’s a safety net

The first reason why you won’t run out is that Australia offers a safety net for all those aged 67 and over.

This is in the form of an age pension, which is government guaranteed and indexed so that it stays in touch with the income that working Australians receive.

Treasury’s Retirement Income Review in 2020 found that seven of 10 Australians will access an age pension (full or part) as they start their retirement.

By the time they reach their 80s, 80 per cent will receive a pension payment.

The second reason why you won’t run out, is that most people don’t realise that their super savings can continue to grow even though they have started to draw down an income from their fund.

How does this work?

Most people mistakenly take their total super savings, divide this amount by their expected lifespan, and consequently think that this amount is not sufficient to live on and so they are bound to run out.

But that’s not how it works.

As your super funds are withdrawn, so the age pension kicks in for most people. Additionally, your super continues to earn, so it is replenished along the way.

Road to Retirement

Staying the course with superannuation reaps rich rewards when you reach retirement. Photo: Getty

Staying the course with Nick# 

Nick is 70 and has been retired for five years. His money isn’t running out; it’s actually growing!

A former mechanic, he retired on his 65th birthday with $300,000 in his superannuation accumulation account.

Beforehand he met with his Industry SuperFund’s financial planner to discuss his options.

This resulted in Nick starting an income stream in the form of an account-based pension.

He also qualified for a part-age pension, which meant that the bulk of his savings in super remained invested and accessible if required.

Nick remained in control and reassured by the flexibility of being able to withdraw extra money if needed.

Not only did Nick’s balance continue to grow while he drew down an income, he was also better off remaining with his industry fund that he would have been had he switched to a retail super fund.

Here’s what that looked like

  • Nick’s super balance was $300,000 when he retired, and he converted it into an income stream account with his Industry SuperFund
  • Over the past five years he has withdrawn on average about $15,466 a year from his income stream account and was also able to access the government age pension to supplement this income
  • Nick experienced an average five-year Industry SuperFund investment return of 6.91 per cent (2018 to 2023)
  • Today, his Industry SuperFund balance has grown to $326,498
  •  If Nick had switched to a retail fund pension product at retirement, his balance would only be $306,445.

That’s a difference of more than $20,000, simply because he stuck with his Industry SuperFund.

The returns on super in calendar year 2023 have been even higher than previous years. Balanced funds have grown by 9.6 per cent according to research house SuperRatings.

This means that Nick’s Industry SuperFund balance will be growing at an even higher rate.

Even though he is drawing out $15,466 a year as an age pension top-up, his savings balance is increasing.

Stick with your Industry SuperFund in retirement and your money could go further.

Visit today.

Read more of the Road to Retirement series
Part 1: It’s time to take control of your super
Part 2: What you need to know about using your super

This content is sponsored by Industry Super Australia. 

This information provided in this article is of a general nature only and does not constitute financial or other advice. It is important to consider personal objectives, financial situations or particular needs when making financial decisions.

#Nick is not an actual member. His story has been created for illustrative purposes. Past performance is not a reliable indicator of future performance and should never be the sole factor considered when selecting a fund. Comparisons and modelling by SuperRatings, commissioned by ISA, and show average difference in pension net benefit results after the first 5 years of retirement of the main balanced investment options of 8 Industry SuperFund pension products and a sample set of retail pension products tracked by SuperRatings with a 5 year performance history to 30 June 2023 (23 funds), taking into account historical earnings and fees. The model assumes a drawdown amount of 5% per annum, which is deducted monthly. Outcomes vary between individual funds. Modelling performed on 6 October 2023 using data as at 30 June 2023. See the Assumptions page for more details about modelling calculations and assumptions. General advice only. Consider a fund’s Product Disclosure Statement (PDS) and your personal financial situation, needs and objectives, which are not accounted for in this information, before making an investment decision. ISA Pty Ltd ABN 72 158 563 270 Corporate Authorised Representative No. 426006 of Industry Fund Services Ltd ABN 54 007 016 195 AFSL 232514.
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