Advice is the number one weapon against retirees’ FORO

FORO: the fear of running out. It’s an acronym newly popular among those who are waking up to the scale of the challenge facing super funds as they reinvent themselves from being accumulation engines to being a reliable source of income for Australians in retirement.

Problems arising from FORO were canvassed by Deanne Stewart, chief executive of the $210 billion Aware Super – whose retirement thinking is a little more advanced than some other funds – at a recent superannuation roundtable, where it reportedly “dominated discussions”, suggesting that for many in the room it’s a brand-new issue.

But it’s not a new realisation for advisers, nor for anyone who has dealt even cursorily with people as they near the end of their working lives and contemplate the idea of living off the savings they’ve accumulated.

Even if people have an idea of how much income they will need to receive to live a comfortable – or dignified, in super-speak – life in retirement, translating that into the required capital sum at retirement is a much more complex and therefore worrisome task.

The Best Possible Retirement study, done by CoreData Research and Professional Planner publisher Conexus Financial, shows that only 38 per cent of pre-retirees say they know how much income they’ll need each month in retirement, and the same proportion say they understand how much they need to save to fund their income in retirement.

There is, of course, some guidance on this matter that they could refer to. The ASFA Retirement Standard estimates that someone needs $630,000 if they are single, or $730,000 if they’re part of a couple, to live a “comfortable” retirement; and $110,000 if they’re single, or $120,000 if they’re part of a couple, to live a “modest” lifestyle. And the picture changes dramatically if they’re still renting when they retire: $340,000 for singles, and $385,000 for couples, just to live modestly.

ATO data shows that in 2023-24 the median account balance for someone aged 65 to 69 was $218,631 ($230,766 for men and $207,187 for women), and the average balance was $437,422 ($466,600 for men and $407,328 for women).

(The average for all people aged under 65 is just $141,714 and the median is $102,105.)

The ATO notes that its numbers exclude anyone with a zero balance, and that the averages are skewed significantly by individuals with very large balances.

So, measures like the ASFA standard are a double-edged sword. They provide a benchmark, certainly, but both the ATO median and average figures are a long way short of what ASFA says you need for a “comfortable” retirement.

So, it is not unreasonable for anyone whose balance at retirement is less than the ASFA figure to fear that if they live too “comfortably”, they’ll run out of money. That’s what the figures tell them, and retirees who draw down only the minimum amount from their allocated pension are behaving entirely rationally, in-line with the “guidance” they’re seeing and hearing all around them.

The BPR study shows the impact of FORO is even worse than just deterring people from drawing down more than the legislated minimum.

It shows that almost three in 10 (29 per cent) people who draw down the minimum amount spend only 40 per cent of what they do draw down. Around one in 10 (11 per cent) spend 40 to 59 per cent of what they draw down. Just over a third (34 per cent) spend 60 to 89 per cent. And just over a quarter (26 per cent) spend 90 per cent or more of what they draw down.

FORO is real, it’s driving spending behaviour and therefore it’s having a significant bearing on living standards in retirement.

The industry’s response, driven in large part by demands of the Retirement Income Covenant, has been to promote “lifetime income” products (with or without the “innovative” tag attached) – the idea that by spending some of their capital upfront, retirees can lock in an income for the rest of their lives. On the face of it, it’s the answer to FORO because it promises, let’s call it CONRO: confidence of never running out.

But super funds dealing with a cohort of members legitimately worried that they’re going to run out of money face a tough, if not actually impossible, task to convince them to part with any amount of it.

This is clearly and obviously where financial advice enters the chat. The BPR study underscores exactly why access to advice is so critically important to preparing people for, well, their best possible retirement.

The BPR study shows that only four in 10 (41 per cent) people without an adviser understand how much they need to fund retirement, compared to as many as seven in (70 per cent) for those with an adviser. It says this reveals “a knowledge gap at the most critical time, which could severely impact retirement outcomes”.

The bottom line, the BPR says, is that “advice has a major positive impact” on preparing people for retirement.

“This is a dramatic uplift of nearly 30 percentage points over the general pre-retiree population”, it says, and it shows that advice is “the single clearest lever for improving retirement readiness”.

So, clever and innovative retirement income products are all very well, but on the face of it at least, it seems the first step all super funds need to take is getting advice, even if it’s relatively simple, to as many members as possible. Then, and only then, expend time, effort and members’ money on product development.