Retirement is characterised by uncertainty: no one knows how long they’ll live, how markets will perform and ultimately, just how much money they’ll need.

It makes retirement planning incredibly complex. Australia’s record household debt levels suggest that few people have a handle on their current expenses, let alone how much they’ll need once they stop working.

However, big data is changing our understanding and crucially, our behaviour. It doesn’t necessarily take difficult changes that weigh down people’s current lifestyles, to improve their retirement.

Big data reveals the state of retirement

A new analysis by actuarial firm Milliman of the real-world spending data of 300,000-plus retirees (via its Retirement Expectations and Spending service) reveals that retirees’ median annual expenditure is just $31,068.

The Age Pension funds a substantial proportion of that expenditure, meaning retirees need a super balance of approximately $130,000 (invested in a balanced fund) to fund the median retirement with 75 per cent certainty, according to the analysis.

Such a low super balance shouldn’t become the de-facto target (we know that recommended targets are much higher), but it suggests that even small changes to savings rates (and expenditure) can make a significant difference to retirement standards.

Australia has built one of the most advanced retirement systems in the world with more than $2.2 trillion in assets, yet almost three-quarters of retirees still receive some form of the Age Pension according to Treasury.

Financial advisers and funds can help their clients to make the changes they need to afford a better retirement, starting with small steps.

Why small changes are the place to begin

Many clients won’t receive the benefits of their retirement savings for decades. What’s out of sight can easily become out of mind and, given the complexity and mixed messages they receive from an array of sources, people all too often grow disengaged.

Other short-term goals often take precedence such as funding children’s education and paying off a mortgage. The retirement task seems insurmountable, but the evidence shows that small changes really can make a difference.

Those changes don’t have to be painful either. With housing affordability at all-time lows, and accusations that the young folks of today are more focused on buying brunch than building wealth, that’s good news for all of us.

Retirement is probably the furthest thing from the mind of a 25 year-old starting their career earning $75,000 a year. A simplistic calculation (using the ASIC superannuation calculator) suggests they’ll retire with around $318,000 at 65 years of age.

However, salary sacrificing $25 (pre-tax) a week adds $48,420 to their retirement savings thanks to the impact of compound returns. Similarly, contributing $25 a week (post-tax) adds $56,953 to their final retirement savings. And contributing to their long-term financial wellbeing early on in life establishes good habits that go the distance as their lives change.

Small changes can also benefit lower income earners. ASFA estimates that 220,000 women and 145,000 men are missing out on around $125 million of annual employer contributions because their incomes fall below the $450 a month superannuation guarantee wage threshold. Unfortunately many casual workers in low-paying industries such as security, contract cleaning and child care, work two or three jobs but the threshold is applied separately to each employer.

Finding money for super still remains a challenge, but the reality is few people truly know what they’re spending despite a wealth of digital information.

Just 13 per cent of people use an app or online budgeting tool to track their spending compared to 14 per cent who still use pen and paper according to ASIC’s Australian Financial Attitudes and Behaviour Tracker, suggesting a closer analysis can produce savings with minimal pain.

This is an opportunity for advisers to lead the way with financial coaching, just as a personal trainer sets their clients on the path to fitness. However, this is just the start of a broader change gaining momentum as new fintech makes it even easier to ‘nudge’ clients into making positive decisions.

This can involve greater interaction at the point of expenditure through reminders or warnings or more frictionless ways to save small amounts of money.

These are crucial areas to explore if we are to learn anything from the billions of dollars in lost super and multiple super accounts that the industry has allowed to accumulate over decades. Technological change (partly driven by regulations) is now helping to correct this long-standing problem and we have a responsibility to not allow similar mistakes to occur again.

Fintech allows us to encourage people to make small changes over the long term, which is a sure-fire way to remove some of the uncertainty around retirement. Seeing the tangible difference even modest contributions can make is a powerful motivation.

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