Inflation is one of the major risks any retirement income solution needs to effectively address, but the rising cost of living is having another, possibly unexpected impact on retirement, with research suggesting it’s prompting a growing number of Australians to delay retirement over growing concerns they won’t have enough to live on when they stop working.
In May, the Association of Superannuation Funds of Australia updated its retirement standard for the March quarter of 2024, lifting it to $72,663 per year for couples, and $51,630 per year for singles. It was an increase of 0.7 per cent over the previous quarter.
ASFA noted that retirees continue to feel considerable cost of living pressure on their household budgets.
“Ongoing inflationary pressure reinforces the need for Australia’s strong superannuation system which is designed to ensure retirees can achieve a dignified lifestyle in their post-work years, and adequate retirement income to withstand these more challenging times,” the association said.
Just the day before ASFA’s update, profit-to-member super find Equip Super published research showing only a quarter of Australians believe they’ll be able to retire at age 65, and those who are choosing to retire later are delaying it by, on average six years. Equip said around four in 10 of these individuals cite the rising cost of living for the delay.
Concerns about the rising cost of living are generalised in the Equip research, but other research also released in May, by Aware Super, swung the spotlight onto the rising costs of aged care as a specific cause. Its research revealed that 94 per cent of Australians aged 18 to 54 are concerned about aged care costs, and it’s not only 35- to 50-year-olds saying this, the same is true of people aged 18 to 34.
Complex needs
Aware Super head of retirement Jacki Ellis says that is likely due to the experiences with the aged care system that younger people have seen others having.
“That just reflects [that] we all have loved ones, so even if it’s not your personal experience you often typically see loved ones going through that – your parents or family, friends or whatever – and we saw that coming out in the data,” Ellis says.
And completing a trifecta of inputs, in early June Melbourne financial adviser Alex Jamison identified a new cohort of Australians: “unrets”, or people who are “un-retiring” and rejoining the workforce, having retired only to find inflation is eating into their purchasing power and they’re inadequately financially equipped to cope.
“Sadly, if your retirement plan hasn’t been created taking into account inflationary pressures like the type we are experiencing today, then you don’t have a lot of options,” AJ Financial Planning founder Jamison said in a media release.
“You can try and cut back costs and live with it, or you can look to get back into the workforce to start bridging the financial gap. The big question for a lot of people facing this issue is, what do I do and how do I do it? Will getting back into the workforce affect my tax and benefit status?
“The answer is nearly always, yes. So, it is important to discuss these types of decisions with a good financial planner who can help you weigh…the challenges and implications.”
Equip Super head of retirement Sam Higgie says even before a ramping up in cost-of-living pressures, there was some evidence the average retirement age was already getting older.
“If we look at our own member data, we can see that the average retirement age is increasing – in the last four years, it has increased by about a year,” Higgie says.
He says that as the cost-of-living crisis began to bite, Equip saw an increase in ad-hoc withdrawals.
“We’ve started to see over the last six months that starting to peter back down again,” he says.
“It’s making us think that maybe people…they’ve either adjusted to a new standard of living, or they’ve readjusted their income payment. I know we’ve had an increase recently in the age pension…and therefore they’re not tapping into the lump sums as much. With cost-of-living rises, it’s very rare in society [that costs] decrease, so people eventually adapt.”
Higgie says an increase in retirement age and the growing incidence of retirement being delayed hasn’t yet reached a point where assumptions underpinning retirement income strategies need to be thrown out. He says a strategy needs to be applicable to a wide range of member circumstances anyway, and supported by information, guidance and advice to members.
“We get too caught up as an industry trying to find the perfect actuarial solution to retirement, particularly from a product perspective,” he says.
“You’ve got to provide information assistance, and it’s got to be at a time that’s right and relevant for that particular person, and it’s got to be accessible in the way in which they want to access it or absorb that information.”
Flexibility the key
Higgie says funds cannot develop a perfect, one-size-fits-all retirement solution, and must remain flexible.
“If people are retiring later, just because we see that on the data doesn’t mean that we start moving all the goalposts later, and therefore start providing solutions later,” he says.
Higgie says Equip is “a bit different from other super funds in the way we approach retirement income”, particularly how it defines retirement income, and the concept of income maximisation.
“If you look at it just at face value you would say maximising income was based on what is the maximum amount of money I could draw as an income per year,” he says, but Equip comes at it from the perspective of meeting a member’s income needs.
“If you have the ability to draw down an income that meets your needs, anything you draw above that is considered surplus, and that surplus can be used to extend the longevity of your income,” he says.
“We have a very good idea of how much income they would like at retirement and we’re able to essentially align that with the ASFA [retirement] standard.
“We’re able to say on average, a member is going to want the ASFA standard – $51,000 currently. If they have the ability to draw $60,000 a year [but] they’re only going to spend $51,000, they don’t need the additional $9000. The additional $9000 can affect the longevity [of income]. Starting with a higher balance and starting your retirement later doesn’t necessarily change your outcomes, because you’re still going to be drawing the same income either way.”
Ellis says Aware’s members “retire typically around age 65, plus or minus five years” but “like with all things to do with retirement, it’s very individual”
“We do see in certain sectors and cohorts there’s a greater tendency to retire a bit earlier, just because of the nature of that work, particularly if it’s quite physically demanding work or harder to go part-time,” she says.
“But then we also see at the other end, those who can choose to work longer often are, and we definitely have quite a tail of members who are still happily accumulating towards 70 and into their early 70s.”
Ellis says whether the retirement age is rising or falling, the event is less of a one-off event and more of a graduated process.
It may even take someone a couple of attempts to retire properly.
“When we were talking to members, there was this great quote the other day when a guy’s wife piped in from off the side of a member interview, and she was like, ‘Oh, yes, [he] has tried to retire eight times already’,” Ellis says.
“It is going back and forth, and what we’re seeing as a bigger trend is this old-school notion of this black and white moment in time, when retirement happens and then you sail off into the sunset, is becoming less and less a thing, and more and more it’s becoming this sort of fluid transition.”
