Despite the proximity to retirement age, over 50s lack sufficient knowledge of key retirement concepts, according to research from AMP.
The firm’s ‘Retire with confidence guide’ revealed somewhat of a cognitive dissonance in the results – three quarters stated they had not sought advice for retirement planning, but roughly 60 per cent said they wished they started planning for retirement earlier in life.
AMP chief economist Shane Oliver tells Professional Planner this was likely a hindsight reflection where older Australians wish they knew certain information earlier on.
“It’s the typical stage in life theme; when you’re young you don’t worry about it so much because it’s a long way off,” Oliver says.
“When you’re in your 40s [you’re thinking] it’s at least 25 years away so there’s plenty of time to think about it, but trouble is that it creeps up and you find a situation where you could’ve allocated a bit of money in a tax advantaged way to superannuation, but you didn’t do it.”
| For Australians aged 50 and over the research found: |
| 3 in 4 find the retirement system complex |
| 2 in 5 don’t know if they’ll be eligible for aged-pension benefits |
| 7 in 10 don’t know what an account-based pension is |
| 3 in 4 have not sought financial advice for retirement planning |
| 3 in 5 wish they’d started planning for retirement earlier in life |
| 3 in 5 are ‘extremely concerned’ about the rising cost of living |
Source: AMP
Oliver says the amount of over 50s not feeling prepared for retirement or not having financial literacy regarding key concepts is a surprise given the proximity of that age group to retirement.
“We were thinking that people, once they hit 50 would be more literate in terms of retirement,” Oliver says.
“It’s understandable that younger people are less focused on it… but by the time you get to 50 it’s coming up, it’s just over the horizon,” Oliver says.
Return to education
Financial education in schools is often targeted as being insufficient, but given retirement is 50 years away for high school graduates, Oliver backed the suggestion that people needed to be educated on retirement themes later in life.
“You could argue that maybe there should be a government campaign to educate people but a lot comes back to superannuation funds,” Oliver says.
“Superannuation funds are responsible for managing the funds that people have for their retirement and there probably needs to be more information coming from super funds to explain to people these concepts in a simple, easy to understand fashion.”
Oliver adds that 50 is likely to be the ideal age for super funds to start directing retirement-specific information.
“Super funds have been really focused on the accumulation phase but now that we’ve got more and more people heading into retirement as the population ages, the focus has to shift,” Oliver says.
“But it should really start – not when the person retired – it should really start in the run up to that.”
FORO
The report said this lack of financial literacy about retirement has exacerbated FORO – the fear of running out.
This is further mitigated by the fact many older Australians intend to pass on large assets like the family home to help secure their children’s financial future instead of funding their own retirement.
“This imperative complicates the work of financial advisers,” the report stated.
“It irritates many policy makers who question why tax-advantaged savings are used to benefit the next generation rather than underpin retirement lifestyles. Yet, rightly or wrongly, many will ask why securing their children’s future security is a less noble use of their retirement savings than flying first-class to Europe.”
While industry zeitgeist has long suggested 4 per cent as the model drawdown standard, the report argued that 6 per cent would be preferential to generate a higher income without running out of money.
This worked by incorporating a “moderate to high” allocation in growth assets, financial advice and allocating 50 per cent of retirement capital to a market-linked income stream product.
“[the 6 per cent drawdown] leverages the power of compounding large sums at market rates,” the report said.
However, educating retirees and pre-retirees that drawing down and spending more money is beneficial will be a hard sell because of the potential FORO.
“The only way to do that is to start with the person’s balance and then show what would happen to it under various assumptions in terms of how much they would drawdown,” Oliver says.
“It’s really an education process. A superannuation fund can start to inform people on that path, but ideally it requires either some form of financial advice or people access advice which will let them know how much they drawdown.”
Oliver notes the accessibility of similar information pointing to mortgage re-payment calculators as a similar example.
“We really need to have that same level of information available to people when they hit retirement,” Oliver says.
