Produced in partnership with North.
Fear of missing out (FOMO), a form of social anxiety that emerged in the 2000s coinciding with the rise of social media, has been superseded by a new debilitating affliction known as fear of running out (FORO).
While the word debilitating is usually used in a medical context to describe conditions that seriously affect a person’s ability to carry on regular activities, FORO arguably has a similar impact.
It stops people from dining out, travelling and spending money on other enjoyable activities in case they outlive their financial resources and end up destitute.
Unlike FOMO, which primarily affects young people, FORO is indiscriminate. It impacts people of all ages but particularly pre-retirees and retirees, and like most fears, it is not grounded in reality.
According to the government’s 2020 Retirement Income Review, “most people die with the majority of the wealth they had when they retired”.
Research by NMG Consulting, commissioned by the Financial Services Council, also found Australians are drawing down 17 per cent less income in their retirement than what is optimal.
If FORO continues unabated, Rice Warner predicts that superannuation death benefits will jump to $130 billion by 2059 from around $17 billion in 2019.
AMP director of retirement Ben Hillier says reports of people using super as a tax-effective vehicle for building and passing on generational wealth are overstated and, in most cases, an inheritance that includes leftover super is “unintentional”.
“Australians understand that the purpose of superannuation is to help fund a dignified retirement and not to leave a bequest,” he tells Professional Planner.
“Where superannuation is part of an inheritance, it’s usually not intentional but rather because so many retirees have a fear of running out.”
This irrational fear is the reason that half of retirees withdraw their savings at legislated minimums, leaving 65 per cent of super balances unspent by average life expectancy, according to the Grattan Institute.
Minimum drawdown rates are age-based and range from 4 per cent to 14 per cent.
Since their introduction in 2007, they have not increased but have been reduced multiple times, despite the strong long-term performance of superannuation.
This included during the Global Financial Crisis and the Covid-19 pandemic, with the government citing a desire to help retirees preserve their superannuation assets during periods of market volatility.
Over the same period, the super guarantee (SG) has increased to 12 per cent from 9 per cent.
Both actions perpetuate the notion that people need to save more and spend less, which undermines confidence and exacerbates FORO, Hillier says, adding that North was not, and is not, an advocate for reducing minimum drawdown rates or increasing the SG.
“We need people to boost their retirement incomes by giving them the confidence to draw on their savings,” he says.
“We need people to feel secure, so they spend the capital that they already have and that’s a much better result than simply increasing the SG.”
In hindsight, the decision to reduce minimum drawdown rates during the Covid-19 years, proved to be unwarranted.
For the 10 years to 31 December 2024, the average superannuation balanced option returned over 7 per cent per annum, meaning retirees are earning more than they’re withdrawing and spending.
“We had 64-year-olds thinking that they should only withdraw 2 per cent from their super during Covid, which was totally unnecessary because people should be spending more than their investment earnings at a bare minimum and ideally more to maximise their enjoyment in retirement,” Hillier says.
Another problematic mindset that is creeping in among retirees and pre-retirees, according to Hillier, is that superannuation is like a water tank with the tap installed at the top, as opposed to at the base. As such, the tank must remain full in order for people to drink from the overflow. In other words, people believe they should only live off their interest and investment earnings.
“For most Australians that is inefficient, and retirees need to be consuming capital right through retirement to maximise their enjoyment,” he says.
“We’re not talking about letting the tank run dry, we’re talking about advice and solutions that give people confidence.”
AMP is on a mission to help Australians enjoy their retirement and live life to the fullest through careful planning and prudent wealth management to turn superannuation savings into a regular income stream that supports their ideal lifestyle, however simple or extravagant that may be.
The group has a range of retirement income solutions that is designed to be used in conjunction with an account-based pension to pay retirees a high-rate, market-linked income for life.
Based on AMP’s research, retirees using the group’s lifetime income solutions are increasing the amount they draw from super and, on average, spend 60 per cent more. For a couple who previously spent $100,000 a year, they’re now spending closer to $160,000.
“This is only happening because the fear has been addressed and removed,” Hillier says.
“Not only are people empowered to spend more money on themselves, they’re also more confident about spending money on their kids and grandkids. These innovative solutions can improve the whole retirement experience.”
While the take up of lifetime income solutions is still relatively low, Hillier believes they will follow a similar trajectory to account-based pensions, which were launched in 1992 when they were referred to as allocated pensions, and have since become the primary retirement income stream option.
“It was really hard to get people and advisers to change their behaviour because, at the time, people were still withdrawing lump sums, or they had DB [defined benefit] schemes.”
“It takes consumers a while to understand new concepts and I think that’s the stage we’re at with the current wave of innovative retirement solutions.”
The importance of unlearning
For more Australians to maximise enjoyment in retirement, there needs to be both learning and unlearning, according to Hillier.
The superannuation and wealth management industry must change how it engages with members and investors and shift the focus from accumulation to retirement incomes.
Hillier says the key messages that must be effectively communicated include capital is there to be spent, you can’t address every need and risk with one solution, and advice is critical.
“We need to undo thinking that undermines confidence and give people the information and tools to understand that they can do more with less,” he says, pointing out that FORO is at its peak at the start of retirement but subsides over time, demonstrating the stark difference between retirement theory and reality.
“As people start to experience retirement, they realise that they don’t need as much income as they thought to live comfortably,” Hillier says.
“Before retirement, it’s hard to fully appreciate the impact of not having to pay tax, or a mortgage, or support children. Furthermore, there are no work-related expenses like fuel or public transport, and retirees also get discounts.”
As such, the most critical time in retirement is at the beginning because people are still relatively young and healthy, and have the energy to spend time with family, travel and really enjoy life.
“At a time when people are healthy and energised to enjoy their retirement, they’ve got the highest level of anxiety,” Hillier says, citing research that people are really underspending at the start of retirement.
To address this issue, people need to have clear retirement goals and an accurate understanding of their retirement income needs.
In most cases, the amount of savings required to generate the income they need is significantly less than commonly quoted, widely accepted industry benchmarks.
“A lot of people don’t have a clear idea of what they want to achieve in retirement, which is where a financial adviser can add a lot of value,” Hillier says.
“Some people want to spend every last cent before they die and others want to leave the kids an inheritance but, often they forget how valuable the family home can be in achieving that.
“Ultimately, people can enjoy a much higher standard of living in retirement than they think, and the average Australian can absolutely achieve their retirement goals.”
As more retirees start living their best life and sharing their experiences and photos on social media, perhaps the cure for FORO will be a touch of FOMO.
